(In 2nd and 12th paragraphs corrects the decline in bond trading revenue, and in 4th paragraph corrects percent comparison to Bank of America bond trading revenue)
By Anil D'Silva and Lauren Tara LaCapra
Jan 16 Goldman Sachs Group Inc reported a 21 percent drop in quarterly profit on Thursday as revenue from fixed-income trading fell in what Chief Executive Lloyd C. Blankfein described as "a somewhat challenging environment."
The bank's bond trading revenue slid 11 percent, adjusted for an accounting charge, and was greater than those of competitors that have already posted fourth-quarter results. It is also a blow to a bank that counts bond trading, including fixed income, currency, and commodities, as one of its biggest businesses.
The bond market began to soften in the middle of last year as investors prepared for the U.S. Federal Reserve to scale back on its bond-buying stimulus, and longer-term yields started rising. Trading income across Wall Street has been hurt by the move.
Even accounting for the difficult environment, Goldman's bond-trading results lagged peers. Bank of America Corp's fixed-income trading revenue rose 16 percent in the fourth quarter to a level 10 percent higher than Goldman's.
Bond trading had arguably been Goldman's strongest business in the decade leading up to the financial crisis as it raked in billions of dollars from the credit boom and bust.
While Goldman is still a big player in bond markets, fixed-income trading revenue fell to 25.3 percent of total revenue in 2013 from 48 percent at its peak in 2009.
Nonetheless, Goldman Chief Financial Officer Harvey Schwartz sounded cautiously optimistic about the long-term trend.
"When you boil it all down, the 2013 environment is just one where the world took two steps forward followed by one step back, a dynamic which you could see reflected in both price movements in the markets, and client activity," Schwartz said on a conference call with analysts.
"To sum it up, while we wouldn't characterize the last two years as a normal cyclical environment ... it shouldn't be lost on us that the long-term trend is slowly and steadily improving," Schwartz added.
The weak trading results had a real effect on results. On Thursday, Goldman reported net income for common shareholders fell to $2.25 billion, or $4.60 per share, in the fourth quarter, from $2.83 billion, or $5.60 per share, in the same quarter of 2012.
Analysts expected earnings of $4.22 per share, according to Thomson Reuters I/B/E/S.
Excluding an accounting adjustment linked to changes in the value of debt the bank issued, Goldman's bond trading revenue fell 11 percent to $1.89 billion. Total revenue for the bank including the adjustment fell 5 percent to $8.78 billion from last year.
Goldman's shares fell 1.5 percent at $175.99 in early trading.
The cost of compensation and benefits rose 11 percent to $2.19 billion during the quarter, when Wall Street banks make final decisions about bonuses.
For the year, compensation and benefits expenses fell 3 percent to $12.61 billion. Goldman paid out 36.9 percent of its revenue to employees in 2013, the lowest level since 2009.
Its return on equity, which measures how much profit it wrung out of its balance sheet, was 11 percent for 2013, higher than the 10 percent minimum that analysts say banks must produce to meet their cost of capital, but well below the 30 percent returns that Goldman generated before the crisis.
MIXED RESULTS FOR EQUITIES
The bank's equity businesses turned in mixed results.
Revenue from client stock trading fell 22 percent to $598 million, even as stocks hit new highs, while equity underwriting revenue doubled to $622 million as more companies tapped the market for capital.
The bank's own equity investments delivered a 25 percent increase in revenue to $1.40 billion.
The stock market resurgence also helped Goldman's investment management business, which provides advisory services to wealthy clients and manages money through funds.
The business reported a 5 percent increase in revenue to $1.60 billion in the quarter.
Goldman was ranked No. 1 in all major equity underwriting categories in 2013, according to Thomson Reuters data.
It led the high-profile initial public offering of Twitter Inc in the fourth quarter, which alone delivered an estimated $23 million in underwriting fees.
Revenue from advising on mergers and acquisitions rose 15 percent to $585 million.
Overall M&A activity declined in 2013, but there has been a resurgence in recent weeks. Other Wall Street banks have reported healthy backlogs of activity, signaling the business may be turning the corner after several years of decline. (Reporting by Anil D'Silva in Bangalore and Lauren Tara LaCapra in New York; Editing by Ted Kerr and Jeffrey Benkoe)