Goldman Sachs Group Inc., the Wall Street bank with the highest return on equity, reported earnings that beat analysts' estimates as equity-underwriting fees doubled and full-year compensation costs fell to the second- lowest percent of revenue since the firm went public in 1999.
Fourth-quarter net income dropped 19 percent to $2.33 billion, or $4.60 a share, from $2.89 billion, or $5.60, a year earlier, the New York-based company said today in a statement. That surpassed the $4.18 average estimate of 25 analysts in a Bloomberg survey.
Chief Executive Officer Lloyd C. Blankfein, 59, is keeping a lid on compensation costs and relying on investment-banking revenue amid a slowdown in trading, and has said Goldman Sachs doesn't need a major strategy change to boost return on equity. While the firm's stock jumped 39 percent in 2013, it was also the fourth straight year returns fell below the level achieved in the decade before the financial crisis.
"Last year was obviously an impressive year for financial- services stocks," Devin Ryan, a bank analyst at JMP Group Inc. who has the equivalent of a hold rating on Goldman Sachs, said before earnings were announced. "For the next leg up in the stocks to occur, you need to see continued improvement in the fundamentals and ultimately earnings growth."
Goldman Sachs climbed to $179.50 in New York trading at 8:15 a.m. from $178.75 yesterday. While the shares have doubled since December 2011, they are still below their pre-crisis peak of $247.92 on Oct. 31, 2007.
Revenue fell 5 percent to $8.78 billion. Compensation, the firm's biggest expense, was $2.19 billion as the bank lowered its full-year ratio of compensation to revenue to 37 percent from 38 percent for 2012. That was the lowest since 36 percent in 2009. Return on equity for the year was 11 percent, up from 10.7 percent a year earlier.
"Our work in advancing our client franchise and in ensuring continued cost discipline has allowed us to provide solid returns even in a somewhat challenging environment," Blankfein said in the statement. "We believe that we are well positioned to generate solid returns as the economy continues to heal."
Full-year net income was $8.04 billion, up 8 percent from a year earlier as 2013 revenue was little changed at $34.2 billion.
Fourth-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, climbed 22 percent to $1.72 billion. That compared with JPMorgan Chase & Co.'s $1.67 billion in investment-banking revenue and Bank of America Corp.'s $1.8 billion.
The figure included $585 million of financial-advisory revenue, including fees for takeover advice, an increase of 15 percent. Revenue from underwriting, a business led by Stephen M. Scherr, climbed to $1.13 billion in the quarter, including $511 million from debt underwriting and $622 million for equity offerings.
For the full year, investment banking produced $6 billion of revenue, the second highest ever. That was driven by record underwriting revenue of $4.03 billion. The firm said its transaction backlog increased "significantly" compared with the end of 2012.
Goldman Sachs held the top spot among arrangers of global equity, equity-linked and rights offerings in 2013, 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.
Fixed-income, currency and commodity trading revenue was $1.72 billion, down 15 percent from a year earlier and a 38 percent increase from the third quarter. Excluding a $163 million accounting adjustment, revenue was $1.89 billion. That compared with estimates of $1.61 billion from Sanford C. Bernstein's Brad Hintz and $1.81 billion from Matt Burnell at Wells Fargo & Co.
Revenue from the equities division declined 27 percent from a year earlier to $1.68 billion. Excluding a $43 million accounting adjustment, revenue was $1.73 billion. That compared with Hintz's $1.67 billion estimate and UBS AG's Brennan Hawken's $1.65 billion projection.
Total revenue from sales and trading, led by Pablo J. Salame and Isabelle Ealet, was $3.61 billion. That compared with $2.98 billion at Bank of America and $4.07 billion at JPMorgan.
Goldman Sachs posted the biggest decline in trading revenue among Wall Street banks in the third quarter, driven by a 47 percent drop in fixed income. Larger banks have surpassed the firm in bond-trading revenue, where Goldman Sachs set a Wall Street record in 2009 as competitors struggled to recover from the financial crisis.
Analysts including Societe Generale SA's Andrew Lim have said that Goldman Sachs's trading revenue will suffer as rates rise in 2014. The yield on the 10-year U.S. Treasury bond has climbed in each of the past five quarters after hitting a record low in 2012.
Further pressure could come from restrictions on commodities businesses. The Federal Reserve this week said it's considering new limits on banks' trading and warehousing of physical commodities. Policy makers are seeking comment on ways to curb ownership and trading of commodities such as oil, gas and aluminum by deposit-taking banks.
Blankfein has said his firm is committed to its commodities unit, even as rivals such as Morgan Stanley and JPMorgan exit parts of theirs. Morgan Stanley agreed last month to sell a unit that stores, trades and transports oil products to a subsidiary of Russia's OAO Rosneft. JPMorgan said last year it plans to sell some physical-commodity units.
Still, Goldman Sachs put its uranium unit up for sale amid the regulatory pressure, and fielded inquiries about its aluminum warehouse firm, Metro International Trade Services LLC. The lender owns Metro under a merchant-banking exemption and must sell it by 2020.
Investing and Lending, 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 fourth- quarter revenue of $2.06 billion, up from $1.97 billion a year earlier.
Revenue from asset management rose 5 percent to $1.6 billion, the highest since Goldman Sachs started its current reporting structure in 2010. Total assets under management increased $51 billion during the quarter to $1.04 trillion, topping the trillion-dollar mark for the first time.
Provisions for litigation and regulatory proceedings for 2013 almost doubled to $962 million from a year earlier.
The firm has sought to entice investors through buybacks and dividends, returning $11 billion to shareholders in 2012 and the first nine months of 2013, more than double the combined total of Citigroup Inc., Bank of America and Morgan Stanley. Goldman Sachs said it bought back $1.4 billion of stock in the fourth quarter.