Goldman Sachs Group Inc. (GS:US) declined 2.4 percent in New York trading after revenue dropped the most among the biggest Wall Street banks and fixed-income results were the worst since the financial crisis.
Third-quarter revenue of $6.72 billion was 20 percent lower than a year earlier and fell short of the $7.35 billion average estimate of 17 analysts surveyed by Bloomberg. Bond trading plunged 47 percent to $1.29 billion, the New York-based company said today in a statement.
Chief Executive Officer Lloyd C. Blankfein, 59, cut expenses 25 percent in the quarter to offset falling revenue, including a 35 percent reduction in compensation. The firm was the only major bank to post a decline in equities trading, and revenue compared with the second quarter dropped in three of the company’s four business units.
Fixed-income revenue “looks very weak, and surprisingly, it looks clearly weaker than its peers,” said Richard Staite, a bank analyst at Atlantic Equities LLP. “It’s more than just weak client trading, it looks like. They could’ve been badly positioned in the market.”
Goldman Sachs declined to $158.32 at 4:15 p.m. in New York. The stock had gained 27 percent this year through yesterday after advancing 41 percent (GS:US) in 2012. The shares have traded below 1.5 times book value (GS:US) for the past 3 1/2 years, the longest such streak in the company’s history.
Third-quarter net income rose to $1.52 billion, or $2.88 a share, from $1.51 billion, or $2.85, a year earlier, according to the statement. Goldman Sachs boosted its dividend (GS:US) 10 percent to 55 cents.
“The third quarter’s results reflected a period of slow client activity,” Blankfein said in the statement. “As longer-term U.S. budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery.”
Expenses fell to $4.56 billion. Compensation, the firm’s biggest cost, dropped to $2.38 billion and amounted to 35 percent of revenue for the quarter, down from 44 percent a year earlier. The ratio was 38 percent for all of 2012 and was 41 percent for the first nine months of this year.
The bank hasn’t changed its principles on compensation, Chief Financial Officer Harvey M. Schwartz said on a conference call with analysts. It reduced the year-to-date compensation ratio based on current revenue and “better visibility” into year-end pay, he said.
Roger Freeman, an analyst at Barclays Plc, predicts the ratio for the full year will be 39 percent. While a lower figure than that “would likely be welcome news for investors,” he wrote in a note to clients today that “we suspect that the third-quarter represents more of a true-up than anything else.”
Fixed-income, currency and commodity trading revenue of $1.29 billion fell short of analysts’ estimates of $1.85 billion from Sanford C. Bernstein & Co.’s Brad Hintz and $2.04 billion from Staite at Atlantic Equities. It trailed JPMorgan Chase & Co.’s $3.44 billion in fixed-income revenue and Citigroup Inc.’s $2.78 billion.
Goldman Sachs said its revenue from trading in interest rates and mortgages was “significantly lower” from a year earlier. Schwartz said the firm also had losses on inventory positions in its currency-trading business.
“We just didn’t execute as well as we would have liked to,” Schwartz said. “We will have quarters where we will have outperformance and we will have tough quarters. This happened to be a tough one.”
Banks have said clients pulled back amid speculation the Federal Reserve would slow its $85 billion in monthly bond buying. Fed Chairman Ben S. Bernanke said last month that the central bank decided not to taper its stimulus yet.
Part of Goldman Sachs’s fixed-income trading, the firm’s single largest revenue source, comes from physical commodities, which is facing a regulatory review. The Fed is examining all legal and regulatory exemptions that allow banks to participate in the commodities markets, a person briefed on the process said earlier this month.
Goldman Sachs’s physical commodities unit is a “core” business that provides a crucial service to clients, Blankfein said last month.
Revenue from the equities division declined 9 percent from a year earlier to $1.64 billion, excluding accounting adjustments and revenue from a reinsurance business that Goldman sold last quarter. That compared with Staite’s $1.61 billion estimate and a $1.65 billion projection from Credit Suisse Group AG’s Howard Chen.
Goldman Sachs’s equities-trading revenue, the highest among all global banks last year, may have been hampered by a programming error in August that caused the investment bank to send faulty stock-options orders. Most of the trades caused by the error were canceled, a person with direct knowledge of the matter said.
In September, the firm tapped R. Martin Chavez, co-head of the equities-trading division, to take over as chief information officer for Steven Scopellite, who’s retiring.
Total revenue from sales and trading, led globally by Pablo J. Salame and Isabelle Ealet, was $2.94 billion. That trailed the $3.49 billion at Citigroup and $4.69 billion at JPMorgan.
Third-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, was little changed from a year earlier at $1.17 billion. That compared with JPMorgan’s $1.51 billion in investment-banking revenue and Bank of America Corp.’s $1.4 billion.
Goldman Sachs’s figure included $423 million of financial-advisory revenue, including fees for takeover advice, a drop of 17 percent. Revenue from underwriting, a business led by Stephen M. Scherr, climbed 13 percent to $743 million in the quarter, including $467 million from debt underwriting and $276 million for equity offerings.
Goldman Sachs held the top spot among arrangers of global equity, equity-linked and rights offerings in the first nine months, according to data compiled by Bloomberg. It ranked first in advising on announced mergers and acquisitions and fifth in underwriting U.S. bonds, the data show.
The Investing & Lending group, which includes gains and losses on Goldman Sachs’s own investments in stocks, debt, real estate, private equity and hedge funds, as well as loans, posted third-quarter revenue of $1.48 billion, down from $1.8 billion a year earlier.
Revenue from asset management rose 2 percent from a year earlier to $1.22 billion. Total assets under management increased $36 billion from the second quarter to $991 billion. Blankfein said in May that he devotes a “very, very high percentage” of his attention to building that business since it offers the potential for growth even if markets don’t improve.
Warren Buffett’s Berkshire Hathaway Inc. (A:US) this month exercised warrants obtained through a 2008 deal to get 13.1 million shares of Goldman Sachs stock, making Berkshire the investment bank’s seventh-largest (GS:US) stockholder. Buffett and Blankfein have said that Berkshire intends to remain a long-term investor. The firm said today that the deal reduced book value per share by about 3 percent this month.
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