* FICC revenue falls 44 percent to $1.25 billion
* Bank slashes costs to make up for overall revenue drop
* Quarterly dividend raised to 55 cents/shr from 50 cents
* Third-quarter profit $2.88/share vs Street view $2.43
* Shares drop 2.6 pct in afternoon trading
(Adds details about competitors, investment results)
By Lauren Tara LaCapra
Oct 17 (Reuters) - Goldman Sachs Group Inc slashed
employee compensation costs by 35 percent in the third quarter
as bond-trading revenue plunged, an unusual step that signals
the investment bank's concern about performance for the rest of
Revenue from trading fixed-income, currency and commodity
products for clients, one of the bank's biggest businesses,
tumbled 47 percent in the quarter, excluding an accounting
adjustment, Goldman reported on Thursday. That was a much
sharper decline than rivals have posted. The bank's shares fell
2.6 percent in afternoon trading to $158.08.
Harvey Schwartz, the bank's chief financial officer, said
Goldman was hurt by its big mortgage bond business. Client
trading volume in that sector dropped as the Federal Reserve
said it would refrain from changing its bond-buying stimulus
policy, giving investors less reason to trade.
"Goldman showed that they are also mortal," said Michael
Holland, founder of Holland & Co, which owns financial stocks
but does not own Goldman shares.
While rival Morgan Stanley has been building up its
brokerage unit - sometimes painfully - to reduce its reliance on
areas like trading, Goldman has been resolutely sticking to its
traditional businesses, focusing on advising companies,
underwriting and trading securities, and managing assets.
Investors on Thursday seemed less worried about Morgan Stanley.
Its shares rose 14 cents amid a broader market rally to $28.77.
Goldman responded to the weaker revenue by setting aside
less money to pay employees during the quarter - $2.38 billion,
compared with $3.68 billion in the same quarter last year. The
35 percent decline is high compared with competitors. JPMorgan
Chase & Co cut its third quarter compensation expense by
Goldman's compensation costs amounted to 35 percent of its
revenue in the quarter. The bank's target is usually closer to
The bank sometimes cuts the money it sets aside for pay in a
quarter, but it usually does so in the fourth quarter, when
there is no hope of earning extra revenue for the year. Doing so
in the third quarter signals that it does not expect a big
rebound in the fourth quarter, a point Schwartz conceded on the
One bright spot-- Goldman set aside a fair amount for pay in
the first half of the year, when net income was up about 35
percent over the year-earlier period. Even with the third
quarter drop, total compensation costs for the first three
quarters are only down 5 percent from the same period last year.
While the bank may always change the amount of money it sets
aside later in the year, the third-quarter reduction will likely
translate to lower bonuses for employees.
Pay consultant Alan Johnson estimates that across Wall
Street, fixed-income, currency, and commodities trading bonuses
could fall 10 to 15 percent this year, with many employees
getting $0 bonus checks.
Overall, Goldman reported net income for common shareholders
of $1.43 billion, or $2.88 per share, down 2 percent from $1.46
billion, or $2.85 per share, a year earlier. Per-share earnings
rose because of stock repurchases.
Analysts had been expecting earnings of $2.43 per share, on
average, according to Thomson Reuters I/B/E/S. Analysts had
forecast higher revenue, and most of the better-than-expected
performance came from cost-cutting and a lower tax rate, which
are difficult trends to sustain.
Overall revenue fell 20 percent to $6.72 billion. Excluding
an accounting adjustment that investors often ignore, revenue
from the bank's fixed income, currency and commodities business
for clients fell to $1.29 billion, from $2.49 billion. Its
revenue from investments in debt securities and loans fell 46
percent to $300 million from last year's third quarter.
BLAME IT ON WASHINGTON
The bank boosted its dividend for the third time in less
than two years, to 55 cents per share quarterly from 50 cents.
The dividend is a relatively small expenditure for the bank, but
Goldman is usually loath to boost its payout if there are better
opportunities for it to invest the money elsewhere.
"The third quarter's results reflected a period of slow
client activity," Chief Executive Lloyd Blankfein said in a
Blankfein laid some of the blame on the budget impasse in
Washington, which made companies and investors hesitant to take
risk. Wall Street banks that reported earnings earlier in the
month, including JPMorgan Chase & Co, Citigroup Inc
and Bank of America Corp, also reported lower
fixed-income trading revenue, and said that uncertainty about
the Federal Reserve's plans for monetary easing had also hurt
But Citigroup and Bank of America's declines were more in
the 20 percent range. Goldman said its mix of products and
clients, including its mortgage bond trading business and its
focus on institutional clients, was responsible for the bigger
(Reporting by Lauren Tara LaCapra; Editing by Dan Wilchins,
John Wallace and Andrew Hay)
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