Goldman Sachs' US$1b legal hit mars trading bounceback

[NEW YORK] Goldman Sachs Group's comeback quarter for trading was marred by a US$1.09 billion legal charge as the firm gets closer to a settlement of the 1MDB scandal.

Profit dropped 24 per cent in the fourth quarter and fell short of analysts' estimates as the firm bolstered its litigation reserves by the most in four years. That offset a strong showing by Goldman Sachs's fixed-income traders, who posted a 63 per cent jump in revenue, according to a statement Wednesday that debuted the firm's new reporting structure.

The 1MDB affair has been hanging over the New York-based bank since at least 2016. The global scandal involves claims of embezzlement and money laundering that triggered investigations in the US, Singapore, Switzerland and beyond. Goldman Sachs has been under scrutiny for years over its role in raising money for state-owned investment fund 1Malaysia Development Bhd and for the money it made on the deals - about US$600 million.

Shares of the company declined 0.6 per cent to US$244.31 at 9.50 am in New York. They had their best showing in six years in 2019 with a 38 per cent surge.

The trading division, Goldman's biggest, beat some analysts' estimates on the strength of gains in fixed income. The figures included derivatives related to advisory and underwriting businesses that used to be recorded in the investment-banking unit.

JPMorgan Chase & Co set a high bar for industry earnings reports on Tuesday, walloping estimates for its trading division by US$1 billion. Bank of America joined in Wednesday with a 13 per cent gain in trading revenue that also topped estimates. Investors had been expecting the industry's biggest trading desks to rebound from 2018's disastrous finish, and the big banks have so far more than lived up to the hype.

Goldman Sachs's new presentation breaks fixed-income trading into its revenue from market-making efforts and from financing clients. The former provided the biggest boost, as the US$1.38 billion from those activities was 83 per cent higher than a year earlier, when markets were in turmoil.

Goldman Sachs revamped its reporting structure to inject more visibility into how the firm makes money, responding to calls for more clarity. The firm nixed its so-called investing & lending reporting line, often its most profitable segment in periods of rising markets but one that also drew complaints about transparency.

The changes outlined earlier this month will spread the interest income Goldman receives from its lending efforts across all four of the new segments and make the firm's divisions more comparable to its competitors. Equity investments made with the firm's own capital will be housed in a renamed asset-management unit. The bank has said it's looking to move away from taking stakes with its own money and is trying to raise more client funds.

One standout from the fourth quarter was gains the firm made on equity investments, which are now recorded in the asset-management unit. They totaled US$1.87 billion, accounting for the majority of money made in the retooled division. The company said on a call with analysts that it exited its position in Uber Technologies after a lockup period expired.

Goldman Sachs also broke out its consumer-banking results, offering more granularity in its much-hyped foray into banking for the masses. The consumer unit had revenue of US$228 million in the last quarter of 2019, the first full quarter since the company rolled out a credit card partnership with Apple.

BLOOMBERG