GS Goldman Sachs Group Inc

By Liz Hoffman 

A surge in bond trading and deep cost cuts pushed Goldman Sachs Group Inc. to its most profitable quarter in nearly two years.

The New York-based firm reported a profit of $2.35 billion, or $5.08 a share. That compares with $1.27 a share a year earlier, when the bank set aside $1.5 billion to pay a mortgage-bond settlement.

Investors see Goldman as a big winner under a Trump administration, which may pursue lighter regulation, lower taxes and business-friendly policies. Its shares, which fell 1% Wednesday, were still up 29% since the election and have flirted with all-time highs not seen since 2007.

Revenue in the fourth quarter grew 12% to $8.17 billion, and three of its four major business lines reported higher quarterly revenue than they did a year earlier.

Still, revenue for all of 2016 fell 9%, mostly because of a dismal first quarter across Wall Street.

Analysts had expected Goldman to earn $4.82 a share for the fourth quarter on revenue of $7.72 billion.

Goldman has cut $900 million in annualized expenses since the middle of last year, Chief Financial Officer Harvey Schwartz said, beating its $700 million goal. Noncompensation expenses were the lowest since 2007, while compensation as a percent of revenue ticked up slightly to 38%.

Chief Executive Lloyd Blankfein has been cutting costs and shedding employees as the firm grapples with postcrisis regulations and continued low interest rates.

"We're positioning the firm in a way that we can respond to an uptick" in demand for services and capital, Mr. Schwartz said. "By creating efficiencies in this part of the cycle, it gives us the flexibility to invest" should the environment turn more favorable.

Lower expenses helped push Goldman's return on equity, a closely watched measure of profitability, to 11.4% in the fourth quarter. That is the highest of any bank, beating Wells Fargo & Co., which is dealing with fallout from a fake-accounts scandal. It was also Goldman's highest since the first quarter of 2015, when it posted a 14.7% ROE.

Still, it has been a fitful few weeks at Goldman. Several top executives have departed in recent weeks -- including No. 2 executive Gary Cohn to the Trump administration. There is also uncertainty over the president-elect's plans for Wall Street and whether that casts some doubt on Goldman's postcrisis pivot to a tamer institution.

Goldman used its analysts call to introduce its incoming finance chief. R. Martin Chavez, who currently oversees the bank's technology, will take over for Mr. Schwartz in April, part of a series of promotions set off by Mr. Cohn's departure.

Investors had expected a strong result after rivals including J.P. Morgan Chase & Co. and Morgan Stanley reported big boosts in their trading businesses.

Uncertainty brought on by President-elect Donald Trump's election -- and, subsequently, his tweets -- has created openings for traders and lifted the banks they use to place their bets.

Goldman relies more heavily than rivals on trading, which typically supplies about half its revenue. That business was up 25%, mostly on a surge in fixed-income products, which include bonds, commodities and currencies. That unit earned $2 billion, up 70% from 2015, more than compensating for a decline in stock-trading fees.

Commodities and currencies -- so-called "macro" products tied to global economic currents -- were bright spots, while interest-rate products and mortgages were less in demand, Mr. Schwartz said.

After years of declining, debt-trading fees on Wall Street appear to be on the rise. In 2016, the five largest firms booked more than $50 billion in fixed-income revenue, up 16% from 2015.

"If rates continue to rise...there's meaningful upside" to fixed-income, Mr. Schwartz said.

Goldman's investment-banking, which includes merger advisory and underwriting, reported $1.5 billion in revenue versus $1.6 billion a year earlier, the lone business segment to report lower revenue.

It faced a tough comparison, in part because a merger boom that hit a record in 2015 has cooled somewhat. Goldman made less from mergers and stock sales, partly offset by a 28% rise in debt-underwriting fees.

The bank's investment management division, which advises pension funds, asset managers and wealthy individuals on their portfolios, reported higher revenue and record $1.4 trillion in assets under supervision.

Goldman made $1.5 billion on its own portfolio of equity stakes and loans, a hodgepodge segment dubbed investing-and-lending.

That $98 billion collection of investments is about 80% invested in credit, as Goldman has shifted away from the merchant-banking activities frowned upon by regulators and toward corporate and real estate lending.

But its equity portfolio was the big winner, contributing more than $1 billion in revenue as Goldman sold some positions and repegged others to reflect rising asset prices.

Of its roughly $21 billion in equity holdings, some $6.5 billion will have to be sold to comply with Dodd-Frank rules, Goldman has said. The firm has more of those assets than any other bank and has asked regulators for more time to sell them.

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

(END) Dow Jones Newswires

January 18, 2017 15:05 ET (20:05 GMT)

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