Goldman Sachs Group Inc. plans to cut $500 million of expenses this year, mostly from compensation, after reporting the lowest first-half revenue and earnings in seven years.
“We’re controlling the levers that we can, which are expenses and capital,” Chief Financial Officer David A. Viniar, 56, said on a conference call with analysts. “We obviously don’t want to go too far on either one because we think that the world will get better.”
Chief Executive Officer Lloyd C. Blankfein, 57, who has run the company for six years, cut 3,200 jobs in the past 12 months to contend with a slowdown that he said was a temporary reaction to the 2008 financial crisis. After revenue in all of the firm’s businesses fell in the first half of 2012, the company is adding new cost cuts to the $1.4 billion achieved since last year, Viniar said.
Second-quarter net income slid to $962 million, or $1.78 a share, in the three months through June 30, from $1.09 billion, or $1.85, a year earlier, New York-based Goldman Sachs said in a statement.
Earnings beat the highest estimate among 25 analysts surveyed by Bloomberg, boosted by a gain in asset-management revenue. Goldman Sachs, the fifth-biggest U.S. bank by assets, climbed 0.4 percent to $98.11 in New York trading at 12:26 p.m., below the company’s $126.12 in tangible book value per share at the end of June. The company bought back $1.5 billion of shares during the quarter, it said.
“They are managing well in a difficult environment,” Thomas Brown, CEO of Second Curve Capital LLC, said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “It’s still low profitability.”
Return on equity, or ROE, a measure of how well the firm reinvests shareholders’ money, fell to 5.4 percent in the second quarter from 6.1 percent a year earlier and 12.2 percent in the first three months of 2012.
“I would not expect that we’re going to have appropriate ROEs in a macro environment like this,” Viniar said, adding that markets were slower on concern about European government finances and economic growth in the U.S. and China.
JPMorgan Chase & Co., the biggest U.S. bank by assets, last week said second-quarter profit at its investment bank fell 7 percent from a year earlier even as it reduced costs 12 percent. Citigroup Inc., the third-biggest U.S. bank, reported a 12 percent drop in second-quarter earnings Monday and said it lowered total operating expenses 6 percent.
Goldman Sachs’s second-quarter revenue from asset management rose 5 percent to $1.33 billion, exceeding the $1.18 billion average estimate of seven analysts. The figure was boosted by $217 million in so-called incentive fees, which the funds collect from clients based on their performance.
Viniar said incentive fees were helped this quarter by an April sale by Goldman Sachs’s private-equity funds of $2.5 billion in shares of Industrial & Commercial Bank of China Ltd., known as ICBC. Without that transaction, the fees would have been less than $100 million, he said in response to an analyst’s question.
Investing & Lending, the segment that includes Goldman Sachs’s profits and losses from stakes in private-equity and hedge funds as well as from companies such as ICBC and Facebook Inc., produced a $203 million gain in the second quarter, down from a $1.04 billion gain a year earlier. The estimates of seven analysts polled by Bloomberg ranged from a $700 million loss to a $200 million gain.
Investing & Lending “is a volatile business — you do ask questions as to whether investors want to be in this business,” said Christopher Wheeler, an analyst at Mediobanca SpA in London, who rates Goldman Sachs shares neutral.
In Facebook’s initial public offering in May, Goldman Sachs sold 6.18 million of the 14.2 million shares in its own account as well as 22.5 million of the 51.7 million shares held in funds managed for clients, according to the Facebook prospectus. After being sold at $38 apiece in the IPO, which Goldman Sachs helped to manage, Facebook shares have dropped, closing Monday at $28.25.
Major global stock market indexes including the Standard & Poor’s 500 and Hang Seng Index dropped in the second quarter amid signs of slowing economic growth in China and the sovereign-debt crisis in Europe.
“Market conditions deteriorated and activity levels for both corporate and investing clients were lower given continued instability in Europe and concerns about global growth,” Blankfein said in the statement.
The Wall Street Journal reported earlier that Goldman Sachs is targeting $100 billion in loans from its banking subsidiary, up from $12 billion at the end of March, as it places more emphasis on a deposit-taking and lending unit run by Esta E. Stecher. Blankfein was quoted in the article saying “it is a no-brainer that we’ll build our banking business.”
Asked about the plans on today’s conference call, Viniar downplayed them, calling the account an “overstatement” of the company’s strategy of offering loans to wealthy individuals and corporate clients from its banking unit.
“We’re raising deposits and we’ll use some of those deposits for private individual loans, some of it for corporate loans, but we’re not a retail bank,” Viniar said. “We don’t have branches, we’re not going to bring in $1 trillion of deposits, and so there is no change in the strategy of Goldman Sachs.”
Goldman Sachs had $50.9 billion in deposits at the end of March, a fraction of the $1.13 trillion held by JPMorgan, according to company filings.
Second-quarter revenue at Goldman Sachs fell 9 percent from a year earlier to $6.63 billion and was down 33 percent from the first quarter. The average estimate of 16 analysts surveyed by Bloomberg was for $6.25 billion.
For the first six months of the year, Goldman Sachs produced $16.6 billion of revenue, down 14 percent from a year earlier and the lowest since $11.2 billion in 2005. Net income of $3.07 billion in the first six months was the lowest since the company made $2.38 billion in the first half of fiscal 2008.
The firm, which began counting consultants and temporary workers in its staff numbers in 2009, said today it employed 32,300 people on June 29, down from 32,400 at the end of March. At the end of the first half of 2008, the company had 21,800 full-time employees.
Second-quarter expenses of $5.21 billion were down 8 percent from a year earlier. Compensation, the biggest portion of the firm’s expenses, fell 9 percent to $2.92 billion.
For the first six months of the year, the compensation cost, which includes salaries, bonuses, benefits and the expense for awards granted in previous years, totaled $7.29 billion, or 44 percent of revenue. That’s an average of $225,789 per employee, down from $237,662 a year earlier.
Viniar said he expects most of the extra $500 million in cost savings to be “people related,” even though he said the number of employees at the firm will probably increase when the firm brings in junior recruits this summer. Compensation will decline because “we’ll have a more junior and less senior weighted headcount,” he said.
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