Goldman posts smallest profit in four years after bond settlement

Goldman Sachs Group Inc reported its smallest quarterly profit in more than four years as a $5 billion settlement of crisis-era legal claims added pain to an already tough three months.

Like other banks, Goldman had a rough year as oil prices plummeted, concerns about China's economy intensified, and nervousness about the timing and pace of U.S. interest rate increases weighed on credit markets.

Goldman, the last of the big U.S. banks to release fourth-quarter earnings, reported a drop in revenue in all but one of its main businesses.

The only bright spot was investment banking, which helped the bank beat revenue and profit expectations for the three months ended Dec. 31.

Net earnings fell 71.8 percent, making it the third straight quarter that the Wall Street bank's profit has plunged.

Goldman's shares fell as much as 1.9 percent to $153.78 in early trading on Wednesday, their lowest in more than 1-1/2 years.

The new year has also started on a grim note, with oil prices falling to their lowest in 13 years and stock prices dropping sharply around the world.

On the whole, the big banks did better than expected in the quarter, but mainly due to cost cuts - the part of their business over which they have most control.

Goldman cut non-compensation costs by 7.2 percent after excluding litigation and regulatory costs, according to Reuters calculations.

Goldman's net revenue fell 5.4 percent to $7.27 billion, but this beat the average analyst forecast of $7.07 billion.

Net income applicable to common shareholders fell to $574 million, or $1.27 per share, in the quarter from $2.03 billion, or $4.38 per share, a year earlier.

Excluding the settlement, which stemmed from claims the bank had misled mortgage bond investors during the crisis, Goldman earned $4.68 per share, beating the average analyst estimate of $3.53 per share, according to Thomson Reuters I/B/E/S.

Revenue from trading bonds, currencies and commodities (FICC), at $1.12 billion, was the lowest since the fourth quarter of 2008 during the depths of the financial crisis.

FICC comprised 15 percent of overall revenue, a far cry from the days when it regularly comprised about 40 percent.

Bond trading by U.S. banks has been declining since 2009, mainly due to new rules that discourage banks from taking unnecessary risks.

Investment banking revenue - which includes income from deals and underwriting of bond and share offerings - rose 7.4 percent to $1.55 billion.

Goldman ranked No. 1 in advising on both announced and completed mergers and acquisitions globally in 2015, according to Thomson Reuters data.

However, KBW analyst Brian Kleinhanzl said that while advisory revenue was strong, it was unclear if the bank could keep up this momentum given current market turmoil.

Return on equity, a measure of how profitably Goldman uses shareholder's money, was 7.4 percent for 2015, well below the 30 percent or so the bank achieved before the financial crisis.

Many investors argue that banks need at least a 10 percent ROE to cover their cost of capital.

Goldman's total operating expenses increased 38 percent to $6.2 billion. Non-compensation costs jumped 64 percent to $4.14 billion, due mainly to $1.95 billion the bank put aside for litigation and regulatory issues.

Spending on salary and benefits as a percentage of total revenue rose to 28.3 percent, compared with 25.4 percent a year earlier.

The bank's increased spending on employees is contrast to the cost-cutting of its peers on Wall Street.

"All banks are adjusting to lower levels of client activity," said Stephen Biggar, an analyst at Argus Research.

Up to Tuesday's close of $156.82, Goldman's shares had fallen nearly 13 percent since the start of the year. The stock fell 7 percent in 2015, the second-worst performer among the big U.S. banks after Morgan Stanley, which fell 18 percent.