Goldman Sachs Group Inc.'s fourth-quarter profit fell 56 per cent as trading and investment banking revenue plunged, but the bank managed to beat analysts' expectations through cost cutting and lower taxes.
Goldman's results on Wednesday reflected the weakest year for Wall Street since the financial crisis. As politicians and policymakers battled over ways to handle Europe's sovereign debt burden, market volatility surged and Wall Street's clients pulled back on risk-taking, held off on acquisitions and delayed stock and bond offerings.
Wall Street banks cut tens of thousands of jobs and drained bonus pools to respond to the slowdown in business throughout 2011.
Goldman's payroll declined by 2,400 employees during the year, reflecting job cuts across trading, banking and back-office operations. The bank slashed compensation 21 per cent to $12.2-billion, or $367,057 per employee, from $15.4-billion, or $430,700 per employee, in 2010.
"Goldman is adjusting and continuing to operate reasonably well in a difficult environment," said Gary Townsend, president of Hill-Townsend Capital. "I would prefer to see them investing more in their operations, but clearly right now they have to right-size their staffing to be consistent with the revenues the market is allowing them to generate."
Goldman earned $978-million, or $1.84 per share, during the last three months of 2011, down from $2.2-billion, or $3.79 per share, a year earlier.
Analysts on average had expected a profit of $1.24 per share, according to Thomson Reuters I/B/E/S.
Goldman's profit for the full year was $2.5-billion, its weakest year since 2008, at the height of the financial crisis.
Goldman shares were up more than 2 per cent in premarket trading immediately after the earnings report, but lost some of the gains as the morning wore on.
Each of Goldman's business lines -- investment banking, trading, investment management and investing and lending -- reported double-digit revenue declines during the fourth quarter. All but investment management reported lower revenue for the full year.
Goldman's return-on-equity, a key measure of profitability, was a meager 3.7 per cent for 2011. In the years leading up to the financial crisis, it boasted returns of more than 30 per cent.
"They did a decent job on the cost side, but at the end of the day I think Goldman's becoming more and more difficult to analyze," said Jack Kaplan, portfolio manager at Carret Asset Management. "You can no longer count on all the different groups to be doing well at the same time. It looks like nothing's working right now. They were below expectations on virtually everything on the revenue side."
Wall Street rivals including Jefferies & Co , JPMorgan Chase & Co. and Citigroup Inc. have reported similar weakness in capital markets revenue, and also responded with job and pay cuts.
While Goldman's fourth-quarter revenue dropped 30 per cent to $6-billion, the bank took steps to reduce expenses and reported lower taxes than in the year-earlier period. Operating expenses declined 7 per cent to $4.8-billion, while the bank's tax provision of $234-million was down 78 per cent.
The lower expense allowed Goldman to report a better profit than dour estimates released by analysts in the weeks leading up to the earnings report.
In mid-December Barclays analyst Roger Freeman lowered his fourth-quarter profit estimate for Goldman to 75 cents per share, calling 2011 "another year to forget" for Wall Street.