Goldman Sachs Group Inc's fourth-quarter profit fell 56 percent as trading and investment banking revenue plunged, but the bank did better than expected thanks to cost-cutting and lower taxes, sending its shares higher.
Chief Financial Officer David Viniar said Goldman is targeting $1.4 billion in annual cost savings, up from an earlier goal of $1.2 billion, and has a "small amount" left to do in 2012.
Viniar, speaking on a conference call with analysts, also said profit growth must come from higher revenue and not cost cuts. But he added that Goldman was investing in operations at a "more moderate pace" due to a weak business environment.
"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 shares were up nearly 8 percent at $105.29 in afternoon trading on the New York Stock Exchange.
Goldman earnings graphic: link.reuters.com/hac26s
Profit and compensation: link.reuters.com/byc26s
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.
The lull in business, as well as the prospect of reduced profitability amid tighter regulation, has forced major banks to cut more than 100,000 jobs globally and slash bonus pools.
Goldman's payroll declined by 2,400 employees during 2011, reflecting job cuts across trading, banking and back-office operations. The bank slashed compensation 21 percent to $12.2 billion, or $367,057 per employee, from $15.4 billion, or $430,700 per employee, in 2010.
Wall Street rivals including JPMorgan Chase & Co, Citigroup Inc and Jefferies & Co have reported similar weakness in capital markets revenue, and also responded with job and pay cuts.
Morgan Stanley is due to report results on Thursday. Analysts expect Goldman's rival to report a loss, due largely to a $1.8 billion settlement with the bond insurer MBIA Inc. But Goldman's explanation of its own weak performance suggests Morgan Stanley faced revenue challenges as well.
"Ultimately, macroeconomic concerns, heightened market volatility, lower corporate activity and decreased risk appetite among our institutional clients translated into fundamentally lower level of revenue opportunities over the course of the year, hampering our returns," said Viniar.
In contrast, U.S. banks that focus more on business and consumer lending did better in the fourth quarter. US Bancorp and PNC Financial Services Group Inc, two of the largest U.S. regional banks, said on Wednesday that demand for loans from business was increasing, a positive sign for the economy that has turned up in reports from the biggest banks as well.
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.
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 percent for 2011. In the years leading up to the financial crisis, it boasted returns of more than 30 percent.
The returns are a stark sign of how higher capital requirements and a pullback in risk-taking after the financial crisis are hurting investment banks and raising questions about Wall Street's business model.
"It looks like nothing's working right now," said Jack Kaplan, portfolio manager at Carret Asset Management. "They were below expectations on virtually everything on the revenue side."
While Goldman's fourth-quarter revenue dropped 30 percent to
$6 billion, the bank took steps to reduce expenses and reported lower taxes than in the year-earlier period.
Operating expenses declined 7 percent to $4.8 billion, while the bank's tax provision of $234 million was down 78 percent.
The lower tax rate stemmed from the type of profit Goldman earned on a lower revenue base. The bank, which reported a loss in the third quarter, took big write-downs on some securities for the year, which helped lower taxes. Its tax advantage on holdings like municipal bonds was also more prominent in a year when its overall revenue pool was shallower.
Goldman's effective income tax rate for 2011 was 28 percent, compared with 35.2 percent for 2010. Viniar said he expected the rate to go back up to the more typical low 30 percent range in 2012.
The lower expenses in 2011 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.
(Additional reporting by David Henry; editing by John Wallace and Paritosh Bansal)