Goldman Sachs Posts First Quarterly Loss in Six Years -- 4th Update

By Liz Hoffman Features Dow Jones Newswires

Goldman Sachs Group Inc. posted its first quarterly loss in six years as a dismal showing by its trading unit compounded a one-time charge related to the new tax law.

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The Wall Street firm posted a $1.93 billion loss, or $5.51 a share, on $7.83 billion in revenue. A $4.4 billion tax-related charge wiped out the firm's entire quarterly profit and more than half of its earnings for the year.

Shares dropped 3%.

Goldman also was the only one of the five large U.S. banks to report quarterly revenue that declined from a year earlier.

Largely to blame was Goldman's fixed-income trading division, which produced half the revenue it did a year ago. This unit posted $1 billion for the quarter -- nearly its output every two weeks in 2009. For the first time since late 2008, the fixed-income trading unit was out-earned by Goldman's underwriting business.

Goldman's fixed-income desk struggled throughout 2017, losing money on oil and gas trades as well as positions in some low-rated corporate debt. Nothing was clicking in the fourth quarter; the firm on Wednesday cited weakness in all four of the division's main pillars, and Chief Executive Lloyd Blankfein cited a "challenging environment for our market-making businesses."

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Goldman's traders ruled Wall Street before the financial crisis and basked in its immediate aftermath but have struggled with its lasting effects. Calm markets have sapped demand for their skills and specialized products, while new rules nixed the lucrative bets the bank once placed with its own money.

Overall, Goldman's trading revenue fell 34% from a year ago to $2.37 billion. That is the steepest decline among banks that have reported quarterly numbers so far. Citigroup Inc., for example, on Tuesday said trading revenue dropped 19%.

Goldman executives have acknowledged missteps. Over the past two years, it has cut traders, trimmed bonuses, revamped its sales network, and embraced the type of low-margin, high-volume trades it once deemed too trivial to bother with.

Another key is to win more trading business from corporate clients who hire Goldman for boardroom advice but take their securities business elsewhere.

"We absolutely acknowledge that the business footprint and mix we have is a consequence of choices that we made over time. We know that we need to do better," Chief Financial Officer Martin Chavez said on a conference call with analysts. He said it would take "an order of months" to see those changes, some of which have been underway for more than a year, produce new profits.

Still, another poor quarter is likely to intensify calls for more dramatic changes, including a shake-up of the division's leadership, an idea that has gained steam among top executives in recent weeks.

Mike Mayo, a Wells Fargo analyst known for needling bank executives, pushed for answers.

"It just seems like progress should have been a lot faster than it's been," he said. "It's not news that you're under-penetrated to corporate [ clients]. You have great relationships with CEOs, the people at the top of the house, so why can't you do more business trading with those much further down?"

Meanwhile, the firm is looking for new sources of revenue in steadier businesses like consumer banking and asset management. Both gained ground in 2017; Goldman's asset-management division hauled in $42 billion in new long-term money, while its new consumer-lending platform churned out more than $2 billion in fresh loans.

But both will take years to fill the roughly $10 billion revenue hole opened by Goldman's trading woes -- if they ever do.

Goldman took a $4.4 billion charge related to the new tax law, slightly smaller than expected. Most of the bill is a one-time tax on foreign earnings that Goldman has kept overseas. A smaller chunk comes from revaluing certain tax credits, which are worth less now that the corporate rate has gone down to 21% from 35%.

Excluding the charge, Goldman's net income of $2.26 billion was above the $2.04 billion that analysts had expected. It dropped about 4% from the fourth quarter of 2016, when a trading surge around the U.S. election boosted banks' bottom lines.

Goldman's investment bankers, who arrange mergers and underwrite stock and bond sales, brought in $2.14 billion in the quarter, up 44% from a year ago. The unit's annual revenue of $7.4 billion was its second-best on record, aided by gains in debt underwriting, a newer focus for Goldman, and the continuation of a historic M&A boom.

With fewer companies choosing to go public -- particularly within the crop of highly valued Silicon Valley startups that Goldman has courted, angling for IPO mandates -- the bank is leaning more heavily on mergers, debt underwriting fees and secondary stock sales, which all rose.

The firm's asset-management arm, which runs mutual funds and private investment vehicles, reported $1.66 billion in revenue, up 4% from a year ago. Assets under supervision -- a figure that includes money managed in the firm's own branded funds as well as invested on behalf of clients in outside products -- edged up slightly to $1.49 trillion, though the business is still dwarfed by fast-growing giants like BlackRock Inc. and Vanguard Group

Goldman said it expects $130 million in losses on a single troubled loan to an executive of Steinhoff International, a South African retailer in the midst of an accounting scandal.

Other banks including Citigroup Inc. and JPMorgan Chase & Co. have reported nine-figure losses on the same loan, which was spread widely among international banks.

Goldman's stock price rose sharply in the months following the 2016 election, but bounced sideways for most of 2017. It finished the year up about 5%, the worst-performing of the largest U.S. banks.

Write to Liz Hoffman at liz.hoffman@wsj.com

Goldman Sachs Group Inc.'s trading whizzes have lost their touch.

In 2009, $1 billion represented 2 1/2 weeks' work on Goldman's fixed-income desk, a dingy floor downtown that was once Wall Street's most reliable profit machine. Now, as fourth-quarter results rolled in Wednesday, that amount is the fruits of an entire quarter.

The decline reflects problems unique to Goldman, whose struggles have been acute, but also a wider malaise settling over Wall Street's securities operations. New regulations have cast banks as mere toll-takers. Today's market realities reward simple, cheap service delivered digitally over pricey, complex products. Better, more transparent trading data has eroded the informational edge that banks once held over their clients.

The biggest quakes have hit fixed-income trading, a diverse area that spans everything from sovereign debt to precious metals to products tied to global interest rates. Revenue at the four biggest trading banks in 2017 fell between 6% and 30% from 2016, and remains orders of magnitude below peak earning years during the precrisis boom.

In Goldman's fourth-quarter results, its debt and commodities traders posted their worst three-month stretch since the end of 2008. A 50% decline in revenue for the business sent the firm's shares lower and raises pressure on Chief Executive Lloyd Blankfein to fix the business that vaulted him to the top of the firm.

For the first time on record, Goldman's investment bankers, corporate consiglieres who broker mergers and underwrite securities offerings, outearned its fixed-income traders.

Goldman's traders struggled all year, losing money on oil and gas trades and holdings of low-rated corporate debt. Nothing clicked in the most-recent quarter, when a continued lack of price volatility kept clients on the sidelines. Goldman cited declines in all four of its main fixed-income businesses.

The result: 2017 revenue for the fixed-income business of $5.3 billion was little more than a fifth of what it was in 2009.

Goldman executives have acknowledged they were too slow to recognize the lasting effects of the financial crisis. Over the past two years, the firm has cut traders, trimmed bonuses, revamped its sales network, and embraced the type of low-margin, high-volume trades it once deemed too trivial to bother with.

Another objective is to win more trading business from corporate clients that already hire Goldman for boardroom advice but use rivals to manage their market risks.

For too long, Goldman has relied on hedge funds, whose trading business is lucrative but runs hot and cold, and too little on companies and large asset managers, which have more predictable, simpler needs.

"We absolutely acknowledge that the business footprint and mix we have is a consequence of choices that we made over time," Mr. Chavez said on an analyst call Wednesday. "We know that we need to do better." He said it would take "an order of months" to see changes produce new profit.

Yet some tweaks, such as a 2015 reorganization of the firm's corporate sales force, have been in place for longer, with little to show.

"It just seems like progress should have been a lot faster than it's been," Mike Mayo, a Wells Fargo analyst, said Wednesday.

The most recent poor quarter is likely to intensify calls for more dramatic changes, including a shake-up of the division's leadership. That is an idea that has gained steam among top executives in recent months, according to people familiar with the discussions.

Overall, Goldman's quarterly earnings, like those of other big banks, were muddied by the new tax law. A $4.4 billion one-time charge wiped out the firm's entire quarterly profit, producing its first loss since 2011.

Excluding the charge, Goldman's net income of $2.3 billion was better than analysts had predicted. But shares dropped 3% on the trading declines and news that Goldman would dial back its stock-buyback plans to plow earnings into areas where it thinks it can grow.

Those include steadier businesses like consumer banking and asset management. Both gained ground in 2017, helping to boost Goldman's full-year revenue 5%, the best showing among big banks so far. But those efforts will take years to fill the roughly $10 billion revenue hole opened by Goldman's trading woes -- if they ever do.

For the lack of noticeable progress in Goldman's trading turnaround, another firmwide effort is bearing fruit. A few years ago, executives decided to make a play for debt-underwriting business. That business has historically been dominated by big commercial banks, which can write large checks and tap trillions of dollars in cheap deposits to fund them. Debt-underwriting revenue hit a record $2.5 billion for the year and in the fourth quarter surpassed that of JPMorgan, Bank of America and Citigroup.

The firm has made inroads on the back of its merger bankers, who are more often offering debt, in addition to advice, when putting together deals.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

January 17, 2018 15:22 ET (20:22 GMT)