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After 'Challenging' Quarter Goldman Details Cost Savings Plan

After 'Challenging' Quarter Goldman Details Cost Savings Plan
While most of Goldman Sachs Group Inc’s businesses came under pressure, a sharp decline in expenses and more activity in some parts of the fixed-income markets helped the bank clock a higher second-quarter profit.
Chief Financial Officer Harvey Schwartz said on a conference call said that a cost-cutting plan in the first half of the year that will save $700 million a year had been started by the Wall Street bank in response to a "challenging backdrop" for revenue.

With higher revenue in fixed income, currency and commodities trading, as well as debt underwriting, compared with a year ago, the Wall Street bank's profit rose 78 percent which easily beat subdued analyst expectations.
As all of its other businesses reported weaker results, the overall revenue of the bank declined 13 percent. the fact that it had a large legal provision in the second quarter of 2015 and cost cuts helped buoy Goldman's profit.
"Goldman continues to control what it can," Evercore ISI analyst Glenn Schorr said. Goldman bought back stock to help results and kept costs in check and bought back stock to help results, noted Schorr.
The biggest expense for Goldman was paying employees. The bank so far this year has set aside 42 percent of its revenue for compensation and benefits despite the fact that it cut compensation costs 13 percent in the second quarter. Though Goldman tends to adjust that figure toward the end of the year, when it makes final decisions about bonuses, that ratio is flat compared with the first half of 2015.
Schwartz said that the bank will have related severance expenses of about $350 million and its cost-cutting program has involved staff reductions. Hence about half of the annual savings of its cost-cutting initiative in 2016 would be available to the bank.
The bank cut staff by 5 percent during the quarter and has 100 fewer employees than it did a year ago. The bank’s headcount is down 2 percent annually and 6 percent quarterly when adjusting for the 600 employees who joined the bank as analysts during the quarter.
As the outlook for interest rates and revenue has gotten tougher, Goldman has company among big banks that are cutting costs to boost profits. Like other banks facing questions about expenses as well, the Bank of America Corp set a new cost target following its earnings report.
Goldman described business as "challenging" due to low interest rates, political uncertainty and worries about economic growth, even in fixed income markets, where trading activity soared following Britain's vote to leave the European Union.
Annualized return-on-equity of just 7.5 percent for the first half of the year and just 8.7 percent during the quarter was noted as being "Un-Goldmanlike" by Schorr. How well a bank uses shareholder capital to produce profits is measured by the statistic and is hence important. In order to be meeting their cost of capital, a minimum return-on-equity of about 10 percent is expected to be produced by banks, say analysts.
From $916 million, or $1.98 per share, a year earlier, Goldman's net income applicable to common shareholders rose to $1.63 billion, or $3.72 per share overall. $1.45 billion was set aside for legal and regulatory settlements related to mortgages by Goldman in that quarter
There was a fall of 1 percent in the shares of the firm in midday trade. The shares have fallen almost 9 percent overall this year.


Christopher J. Mitchell

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