* Q1 EPS $3.92 vs Street view $3.55
* Average daily value at risk down sharply
* Raises quarterly dividend to 46 cents/share from 35 cents
* Shares close down 0.7 percent
By Lauren Tara LaCapra
April 17 (Reuters) – Goldman Sachs Group Inc posted a
23 percent decline in quarterly earnings after it dialed down
risk-taking in tricky markets, and clients also reduced their
appetite for bets.
The results show just how much the new regulatory
environment, as well as recent market tumult, are spurring
Goldman Sachs to take less risk. It is a real turnabout for the
bank, which in the years leading up to the financial crisis was
one of the most aggressive on Wall Street.
A measure of Goldman’s risk-taking fell 16 percent from the
same quarter last year and 29 percent from the fourth quarter.
The bank said it was boosting its dividend, which to some
analysts is a signal that it sees fewer opportunities for making
money in markets.
“We have been cautious on risk and we remain cautious on
risk given the environment,” Goldman Chief Financial Officer
David Viniar said on a conference call Tuesday morning. “And I
think that is also reflective of the fact that our clients have
been cautious on risk and remain cautious on risk.”
As part of its de-risking strategy, Goldman sold $2.5
billion worth of its stake in Chinese bank ICBC this
week. Goldman has held a stake in the bank since 2006, but the
investment has been a volatile one in recent years, alternating
between quarterly gains and losses of $905 million and $1.05
billion, respectively, since 2010.
Goldman’s ICBC investment is now worth just under $2
billion, Viniar said, describing the stake reduction as “purely
a de-risking sale” because it had gotten too big.
In fixed income, currency and commodities trading, one of
the biggest sources of profit for the bank over the last decade,
Goldman highlighted interest-rate products as a bright spot and
said other major businesses reported lower revenue.
In another move that made the Wall Street firm look a little
more like a run-of-the-mill commercial bank, Goldman raised its
dividend 31 percent to 46 cents per share.
It is only the third dividend increase since the bank went
public in 1999. It last raised the dividend in 2006. Goldman
executives have repeatedly said they prefer using capital for
business investments, or returning money to shareholders through
stock buybacks.
The decision to raise the dividend came after pressure from
shareholders, Viniar said, but management expects buybacks to be
“the predominance of our capital management activity.”
The bank spent $362 million to buy back 3.3 million shares
during the first quarter, on the heels of a $6 billion buyback
program in 2011. Management is authorized by Goldman’s board to
repurchase another 60.3 million shares.
Goldman’s new dividend represents a payout ratio of 27
percent of its average earnings over the past four quarters.
Its chief Wall Street rival, Morgan Stanley, pays a
quarterly dividend of 15 cents per share, which represented 54
percent of average 2011 quarterly earnings. Morgan Stanley,
which reports first-quarter results on Thursday, has said it
will not increase its dividend in the near term because it plans
to use capital to buy a greater portion of its Morgan Stanley
Smith Barney joint venture with Citigroup.
But JPMorgan Chase and Wells Fargo & Co both
recently raised dividends when announcing first-quarter results.
JPMorgan’s upcoming quarterly dividend of 30 cents per share
represented 27 percent of average earnings for the past four
quarters. Wells Fargo’s dividend of 22 cents per share
represented an average payout ratio of 30 percent.
Bank of America Corp and Citigroup Inc pay
nominal dividends of a penny per share.
Goldman’s shift toward a lower risk profile comes as
investment banks have found their profits under pressure from
continued stress in the capital markets. New U.S. regulations
are aiming to limit risk-taking at the biggest banks, through
measures including higher capital requirements, restrictions on
trading, and curbs on investments in hedge funds and private
equity.
But investors had been expecting Goldman to find ways to
increase profitability and post even stronger results,
especially after JPMorgan and Citi outperformed expectations in
the first quarter.
Goldman’s revenue from fixed income, currencies, and
commodities was $3.5 billion, down 20 percent from a strong
year-ago quarter but more than double the fourth quarter. UBS
analyst Brennan Hawken described the revenue as “light” against
his forecast of $4.2 billion.
Revenue was down across most of Goldman’s businesses
compared with a year earlier, except for financial advisory and
stock trading for clients.
Its investment management division was perhaps the weakest
business, reporting net outflows and lower revenue. Analysts had
expected gains at money-management firms across Wall Street
because of a stock market rally during the first quarter.
“We believe the market was expecting a strong quarter,
particularly after seeing the capital markets revenue beats at
the universal bank reports thus far,” said David Trone, an
analyst at JMP Securities. “Add the investment management
difficulties and Goldman shares could be in a tug-of-war today.”
Goldman’s shares ended the day down 0.7 percent at $114.86
on the New York Stock Exchange. The stock is up 29 percent so
far this year.
PROFIT BEATS EXPECTATIONS
Goldman earned $2.07 billion after preferred dividends, or
$3.92 per share, for the first quarter. In the year-ago period,
which was generally stronger for investment banks’ trading and
banking activity, it earned $4.38 per share, excluding a
one-time cost for buying back preferred stock from Warren
Buffett’s Berkshire Hathaway Inc.
Analysts had expected $3.55 per share, according to Thomson
Reuters I/B/E/S.
Goldman’s annualized return-on-equity – a closely watched
measure of profitability – was 12.2 percent during the first
quarter, up from a meager 3.7 percent last year, but still far
below pre-crisis levels above 30 percent.
“You saw pretty good pickup in ROE, although not something
that we consider acceptable,” Viniar said.
The bank’s average daily value at risk – which measures the
maximum that Goldman could have lost on 95 percent of trading
days – was $95 million during the first quarter, down 16 percent
from the year-ago period and 29 percent from the fourth quarter.
With revenue under pressure, Goldman also made further cuts
to staffing and expenses to boost its bottom line. The bank set
aside $4.4 billion for compensation and benefits during the
first quarter, down 16 percent from a year earlier. It also
reduced its workforce by 900 employees, or 3 percent.
The staff and cost reductions were the final stretch of an
aggressive cost-cutting program that began during the second
half of 2011. Viniar said Goldman is likely finished with the
effort as long as market conditions do not unexpectedly change.
