Yesterday was Goldman Sachs 3Q results day. Needless to say, this was eclipsed by the unexpected news that Vikram Pandit had resigned as CEO of Citigroup. Now that the Citi dust has settled, Goldman's 3Q merits further inspection.
The past quarter suggests Goldman is endeavouring upon a firm, steady, sustainable course. Unlike it's 2Q results when an unexpected $500m of further cost cuts were revealed (taking the total to $1.9bn), there were no new cost cutting initiatives announced. Instead, during yesterday's call soon-departing CFO David Viniar merely reiterated the $1.9bn cost reduction figure, most of which he said had either been realized already or will be realized by the end of the year (suggesting more redundancies are a possibility at Goldman in the coming three months).
However, Viniar was at pains to remind listeners that not all Goldman's $1.9bn savings will come from redundancies and lower compensation. "Part of that is non-comp," he pointed out. From this perspective, Goldman looks strong. As we've remarked previously, non-compensation expenses have been a big problem for banks this year. They're sticky. Many banks have struggled to get non-compensation costs down, putting pressure on headcount and pay. At Goldman, however, non-compensation expenses fell 10% in the first nine months - making way for the amount it spends on compensation to rise by precisely the same amount.
At the same time, Goldman is reining in its risk. While JPMorgan's Value at Risk went through the roof in the third quarter - rising by 111% year-on-year overall and by 146% in fixed income sales and trading alone, Goldman's VaR fell 25% last quarter. This made Goldman more VaR -efficient (ie. it got more revenues for the risk it took), said Betsy Grasek at Morgan Stanley.
And finally, Goldman is focused on rewarding shareholders. When yesterday's increased stock dividend and repurchase of common shares are taken into account, Goldman returned 101% of its earnings to shareholders say analysts at Creditsights. The firm has also been incrementally reducing leverage In Q407 it was levered 17.5x, by Q312 it was levered only 9x. Goldman is less risk-hungry, less levered, and has a larger pool of liquid assets.
Goldman's paying, but when will it hire again?
Goldman added 300 people in the third quarter - many of whom are likely to have been members of its 2012 analyst and associate classes. Year-on-year, however, its headcount was down by 1,600 people.
For those who've kept their jobs at Goldman, 2012 looks like being a lucrative year: compensation per head is up 15% vs. 2011 and is on track to reach an average of $449k.
During yesterday's call, Viniar reiterated the plan to invest most heavily in "growth markets." He said too that there are good "near-term" opportunities in Europe and the US, which - despite the economic issues, also merit some investment (and possible hiring).
What's holding back big hiring of the kind Goldman indulged in during 2009 and 2010 when it added 3,000 people each year?
Viniar said the underlying restraint risk taking [and therefore revenue growth] right now is political risk: "There's still so much political uncertainty out there that's driving markets. A speech by politician x or politician y drives markets up or down as much as any economic situation. And in that environment, it's very hard to have conviction and very hard to take risk both for our clients and for us. And I think, until you see that change a little bit, you won't really see our risk go up dramatically."