Goldman Sachs’ Profit Falls Amid Huge Decline In Trading Revenue

And yet it’s the only bank to beat analysts’ expectations for profit and revenue.

Goldman Sachs Chairman and CEO Lloyd Blankfein Getty Images Mark Wilson

Goldman Sachs did better than expected but still, like its competitors, worse than last year.

The investment bank had earnings per share of $4.38 in the fourth quarter of the last year along with revenues of $7.69 billion, outpacing analyst expectations of $4.32 per share and $7.64 billion. The numbers were still short of last year’s fourth quarter, when Goldman earned $4.60 per share with revenue of $8.8 billion, declines of 5% and 12%.

So far, Goldman has been the only large bank to outpace analysts’ expectations for earnings, but it hasn’t satisfied investors — the bank’s stock is down 1.5% to $175.78 in late-morning trading. Goldman’s expectation-beating performance came in spite of a huge decline in revenue for its usually lucrative fixed income trading business.

Goldman’s revenue from its bond, currencies, and commodities trading business fell 29% to $1.2 billion, dropping more than its competitors across Wall Street. The big drop brought its full year revenue for fixed income down to

JPMorgan’s fixed income revenue dropped 14% over the year to $2.5, not counting the sale of a commodities business, Citigroup’s fell 16% to $2 billion, while Bank of America’s dropped fell 21% to $1.5 billion. Goldman, which does not have large consumer businesses like its megabank peers, leans on the more volatile trading and investment banking businesses for the bulk of its profits.

Goldman said the big decline was due to “significantly lower net revenues in credit products and lower net revenues in mortgages” and “partially offset” by “significantly” higher revenues in commodities, currencies, and financial products related to interest rates. Goldman said that its fixed income division “operated in an environment generally characterized by difficult market-making conditions and continued low levels of activity, particularly in credit products, interest rate products and mortgages.”

The decline in fixed income trading revenue was not, however, matched by a decline in revenue from trading stocks for clients. Goldman’s equities business has $1.93 billion in revenue, a 15% jump, thanks to higher volumes of trades, generally rising prices, and more volatility, the bank said in a statement. Its total trading revenue for the year was $15.2 billion, the lowest since 2005, according to data from Bloomberg.

“Certain types of volatility will drive more client activity in certain will make people want to proceed it be a little more protective,” Goldman Chief Financial Officer Harvey Schwartz said in a conference call with analysts.

Bank analysts have for months been bemoaning the lack of volatility in financial markets, which then meant less trading activities for investment banks to handle. Volatility significantly picked up in the end of the year, which commodity prices falling, the debt of energy companies getting hit, and government bond prices moving around more quickly than usual. “It’s like Goldilocks, it’s too cold, it’s too hot, we can’t find the right temperature,” Schwartz said.

Schwartz also said that Goldman’s losses on a loan to failed Portuguese bank Banco Espirito Santo were a contributor to the big decline in fixed income revenue: “We were very surprised by the bank unexpected and very surprising reversal,” Schwartz said, calling the loss “immaterial” to the bank’s whole business and the “primary” driver of the losses.

The bank was able to get higher profits in the fourth quarter partially by yanking down its compensation spending, which fell to $1.96 billion, down from $2.8 billion in the third quarter and $2.19 billion in the fourth quarter of last year.

The big drop in the fourth quarter brought 2014’s compensation spending to $12.7 billion, about the same as last year, all while total staff grew 3%, meaning less per (very well-compensated) employee.

It also had a much smaller legal bill than its competitors, setting aside only $161 million, far less than the $561 million it set aside in the fourth quarter of last year.

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