Goldman Sachs Q4 profits drop as it braces for hefty 1MDB fine

Solomon has scheduled an investor day later this month to boost share price. (AP pic)

NEW YORK: Goldman Sachs reported a drop in fourth-quarter profits on Wednesday following a mixed performance in its operating businesses as it set aside US$1.1 billion in anticipation of settlements in the 1MDB scandal.

Chief Executive David Solomon said the “preponderance” of the US$1.1 billion was related to 1MDB, a scandal-plagued Malaysian investment fund for which the US bank helped raise US$6.5 billion.

The Justice Department has said more than US$4.5 billion was stolen from 1MDB by high-level officials at the fund and their associates between 2009 and 2015.

The scandal has dramatically remade politics in Malaysia and led to US indictments of two ex-Goldman bankers, one of whom pleaded guilty.

Settlement talks with US and Malaysian authorities are “progressing and remain active”, Solomon told analysts on a conference call.

“We are working hard to bring closure to this matter as quickly as possible,” he added.

“Over the past several years, we have taken the time to be self-critical and reflective to ensure that our culture of integrity, collaboration and escalation only improves from this experience,” he said.

“These efforts will continue.”

The legal charge played a role in Goldman’s 25.8% drop in fourth-quarter profits to US$1.7 billion, while revenues rose 25.4% to US$9.0 billion.

In addition to higher legal costs, Goldman spent more on compensation, benefits and technology.

‘More ambitious targets’

Goldman suffered a drop in financial advisory revenues due to a “significant” decrease in mergers and acquisitions.

However, Goldman’s other major divisions saw higher revenues.

These included asset management, which was boosted by big gains in public equities during the quarter, as well as global markets, which benefited from increased trading of financial products linked to interest rates and commodities.

Solomon credited the bank with a “strong” performance in the fourth quarter and offered a fairly upbeat economic outlook, citing an improvement in sentiment in the fourth quarter following progress on the US-China trade matters and Brexit.

Solomon has scheduled an investor day for later this month, part of an effort to boost Goldman’s share price, which has lagged that of JPMorgan Chase and some other leading banks.

Chief Financial Officer Stephen Scherr said the company will release “more ambitious targets” than in 2017 when Goldman mapped out a plan to attain US$5 billion in organic growth initiatives.

“We will not be focused on revenue targets but rather on returns and efficiency consistent with our broader long-term strategic plans to drive shareholder value,” Scherr said.

Bank of America

Also Wednesday, Bank of America reported a dip in fourth-quarter profits, with a hit from lower interest rates dragging profits lower.

Net income at the US banking giant came in at US$7.0 billion, down 3.9% from the year-ago period.

Revenues slipped 1.4% to US$22.4 billion.

Profits slipped in Bank of America’s consumer banking business, its biggest operating division, due to a fall in net interest income, which reflects the difference between what the bank charges for loans and pays in deposits.

Executives said they expect the impact from lower interest rates to moderate as the bank reduces its interest payouts for some deposits.

A bright spot was higher revenues for fixed income trading activities, also a strength at other large banks.

Shares of Goldman Sachs ended down 0.2% at US$245.21, while Bank of America fell 1.8% to US$34.67.

Bank of America’s decline likely reflected investor disappointment at the drop in profits after rivals JPMorgan Chase and Citigroup reported higher earnings on Tuesday.