Goldman Sachs Joins the Cost-Cutting Brigade

Money

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Goldman Sachs (NYSE:GS) got up on the wrong side of the bed Thursday. Shares closed Wednesday night at $162.25, up nearly 3 percent for the day, but erased those gains and then some after reporting third-quarter financial results that fell short of analyst expectations, and revealed that Wall Street’s best trading bank experienced a rare breakdown in its trading machine.

Total net revenues at the firm fell 20 percent on the year to $6.7 billion, missing the average analyst estimate of $7.36 billion — a result that still would have been a fairly unattractive 11.9 percent year-over-year decline. Revenue declined across most segments and subsidiaries, but notably Goldman Sachs experienced a 44 percent year-over-year decline in revenue in its fixed income, currency, and commodities client execution services segment. Revenue from this segment accounted for about 19 percent of total net revenue in the third quarter, a dramatic decline from about 29 percent in the year-ago period.

While the third-quarter revenue decline is fairly dramatic, it’s important to keep in mind that Goldman Sachs total net revenue for the first three quarters is still up 2 percent on the year at $25.4 billion. Revenues in its fixed income business have still declined about 12 percent, but the bank has experienced enormous increases in revenues in its underwriting business.

Where revenues fell short, earnings exceeded expectations. Diluted earnings per share of $2.88 beat the average analyst estimate of $2.43, a 1 percent gain on the year, thanks in large part to dramatic reductions in operating expenses (down 20 percent on the year.)

Goldman Sachs joins other major financial institutions in reporting third-quarter results this week. On Tuesday, Citigroup (NYSE:C) revealed that headwinds had eroded its earnings significantly. The firm said revenues excluding special items — such as CVA/DVA, tax benefit, and costs associated with the Morgan Stanley Smith Barney joint venture — fell 5 percent to $18.22 billion. On a comparable unadjusted basis, Citigroup revenues of $17.9 billion were up 30 percent on the year, a result of large one-time items in the year-ago period.

Citigroup reported adjusted net income of $3.26 billion, or $1 per share, which compares against net income of $468 million, or 15 cents per share, in the year-ago period. Excluding special items — the firm took a pretax loss of $4.7 billion related to the MSSB joint venture ($2.9 billion after tax) — earnings of $1.02 per share were down 4 percent on the year.

JPMorgan recently reported an unexpected net loss of 17 cents per share for the third quarter, largely the result of enormous legal expenses. Analysts were expecting a profit of about $1.19 per share, which compares against year-ago earnings of $1.40 per share. JPMorgan reported a pretax expense of $9.15 billion in the third quarter, or $7.2 billion after tax, for corporate legal expenses.

After settling with regulators for $920 million in September, JPMorgan is expected to settle with the Commodity Futures Trading Commission for approximately $100 million.

Perhaps most surprising about Goldman’s third-quarter report was not the revenue decline but the dramatic cost cutting that it reported. For the nine-months ended September 30, total operating expenses declined 4 percent, which includes a 5 percent year-to-date reduction in compensation and benefits. However, third-quarter compensation expenses declined 35 percent on the year, which many observers were not expecting.

Bank of America (NYSE:BAC) has also experienced success despite economic headwinds, growing earnings by cutting costs even as revenues flounder. Bank of America reported this week that net income jumped sharply, climbing to $2.5 billion, or 20 cents per share, from $340 million, or zero cents per share, in the year-ago period.

However, with revenues effectively flat at $10.5 billion, the bank’s increased profit was driven primarily by improved credit and financial conditions and reduced costs.

Bank of America’s third-quarter earnings beat analyst expectations by about 2 cents per share, although revenue fell slightly short. The bank’s cost-cutting plan, Project New BAC, was announced in 2011. As part of the program, the bank said it would reduce its headcount by approximately 30,000 people, remove an entire layer of middle management, reduce net expenses by $5 billion through 2014, and generally undertake a massive restructuring of operations to make it more efficient and competitive, according to a company release.

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