Goldman shares tumble as weak trading, higher pay hit profit

© Reuters. FILE PHOTO: The logo for Goldman Sachs is seen on the trading floor at the New York Stock Exchange (NYSE) in New York City, New York, U.S., November 17, 2021. REUTERS/Andrew Kelly

By Matt Scuffham, Noor Zainab Hussain and Niket Nishant

(Reuters) - Goldman Sachs Group (NYSE:GS) missed quarterly profit expectations on Tuesday as weak trading activity and rising expenses blighted the gains from a record-breaking M&A boom, sending the shares of Wall Street's premier investment bank down more than 8%.

Bank earnings in the fourth quarter have taken a hit from weak trading volumes as the Federal Reserve slowed the pace of its asset purchases after 18 months of pumping liquidity into capital markets to ease the impact of the COVID-19 pandemic.

Goldman's performance was also marred by higher special charges of $432 million, mostly related to provisions for litigation and a reserve build of $213 million.

Wage inflation has also crimped banks' profits as America's top lenders are forced to raise salaries for junior bankers over the past year to retain top talent.

"Most prominently and surprisingly, the compensation ratio increased from 23.3% to 25.7% Q/Q, whereas we had it estimated as down to 21%, or in line with last year's number," Oppenheimer analyst Chris Kotowski said. "This is the first time we've been covering the stock where the ratio increased 3Q to 4Q."

Goldman's operating expenses jumped 23%, mainly due to higher compensation and benefits costs. Last week, JPMorgan's top executives flagged similar high expenses and said the lender was ready to splurge on compensation to win the talent war against rival banks.

Meanwhile, Goldman's trading unit suffered from comparisons with last year, when wild swings in global financial markets drove up trading revenue to all-time highs.

Its earnings per share is expected to drop from $59 in 2021 to $41 in 2022, as per consensus estimates and so "it is not as though the world doesn't understand that 2021 was a unique and likely unrepeatable year", Kotowski said.

Revenue from the global markets business, which houses the trading business and accounts for roughly a third of the bank's overall revenue, fell 7% to nearly $4 billion, owing to weakness in both equities and fixed income trading.

Equity underwriting revenue fell 8% due to lower income from secondary stock offerings.

TRADING PAIN

Like its rivals, Goldman's trading slowdown overshadowed a 45% jump in investment banking revenue to $3.80 billion as its top rainmakers raked in record fees from advising on some of the largest mergers, initial public offerings and deals involving special purpose acquisition companies.

The country's largest bank, JPMorgan Chase & Co (NYSE:JPM), too had faced the brunt of a slowdown in its trading arm, which sent its shares down as much as 6% as analysts expressed concern over its forecasts for future profitability.

Goldman's net earnings applicable to common shareholders fell to $3.81 billion in the quarter ended Dec. 31 from $4.36 billion a year earlier.

Earnings per share fell to $10.81 from $12.08 a year earlier. Analysts on average had expected a profit of $11.76 per share, according to Refinitiv data.

Total net revenue rose 8% to $12.64 billion, driven by its investment banking and consumer and wealth management units.

Its consumer bank, Marcus, a key component of Chief Executive David Solomon's strategy, continued to build on the momentum from the previous quarters.

While the unit is much smaller compared to traditional Main Street lenders, it grew 8%, driven by higher credit card and deposit balances.

Under Solomon, the bank has stuck with a plan to build its consumer loans and credit card businesses.

Since taking over the reins from Lloyd Blankfein in 2018, Solomon has looked to diversify the bank's revenue with an aim to focus more on predictable revenue streams like consumer banking, mass-market wealth management and cash management.