Goldman gains mask revenue decline

On the surface, Goldman Sachs had a triumphant first quarter.

The company’s first quarter results managed to beat analysts’ expectations, and the iconic Wall Street investment bank said it would raise its dividend.

The demand for bond trading and debt underwriting, as well as derivatives used for hedging offset declines in other core areas of the bank’s business in the last few months.

In a statement, chief executive Lloyd Blankfein cited “stronger global markets, together with the firm’s deep and broad client franchise” as reasons for the improved results. He also stated, “the mix of businesses gives the firm significant room for revenue growth.”

However, its achievements mask lurking problems. The jump in earnings was a quirk related to repaying Warren Buffett’s Berkshire Hathaway last year. Revenue, which fell in the 2011 fourth quarter due to global woes and traders pulling back, may have more than doubled, but still fell 16% compared to last year and 23% if payments to Berkshire are included.

Goldman turned to cost-cutting to ensure its future success. The bank slashed 3,000 workers over the past year, about 8% of its work force, and trimmed expenses by 14% through salary cuts, reduction in real estate expenses and paying less in brokerage fees.

Average compensation per employee, which includes benefits, fell to $135,000 for the quarter, compared with $148,000 a year ago. And the rise in net income available to common shareholders, which rose 128% from $908 million, only strips out payments made to Berkshire Hathaway when Goldman bought back the investment and lifeline that Berkshire provided during the crisis.

Like the rest of the U.S. banking industry, Goldman is struggling to navigate a world of stricter government controls that’ll dry up its key revenue streams. Current regulations will reduce the bank’s ability to trade for its own account, previously a source of profits during volatile periods.

In a call with analysts, chief financial officer David Viniar said he expected the regulatory uncertainty to last for a while as rulemakers hammer out how to implement the new regulations.

Goldman doesn’t have a large consumer-banking arm to fall back on when investment-banking revenues are crimped. Its clients are mainly hedge funds and multinational corporations that hedge bets on foreign currencies, fluctuating interest rates and commodities.

As a result, analysts wonder if the bank can benefit by taking some of their market share. Viniar says Goldman has seen some opportunities to buy assets, but gave little detail.

Revenue from underwriting stock and bond sales fell 27%; and revenue from trading for clients fell 14%, hurt by lower fees and muted revenue from trades bonds, currencies and commodities. Total revenues fell to $9.9 billion from $11.9 billion. Revenue from financial advising was one of the few areas to record a gain of 37%.

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The bank also announced it would raise its quarterly shareholder dividend to 46 cents per share from 35 cents, something it’s permitted to do after passing the government’s most recent round of stress tests. Citigroup and Bank of America, on the other hand, are paying dividends of just a penny.

Still, it recorded a quarterly loss last fall, only its second since going public in 1999. In 2010 and 2011, its net income fell year-over-year in six of the eight quarters. Return on equity in the first quarter was about 12%, down sharply from 38% five years ago.

Goldman’s also dealing with a mounting public-relations crisis. Last month, consumer wrath against the bank came to a head when a mid-level executive resigned via a blistering editorial in the New York Times about the bank’s disregard for clients. A raft of regulatory investigations, fines and lawsuits have followed, including a $22 million fine paid last week to settle regulators’ charges.

Read: Rough Day for Goldman Sachs