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Goldman Sachs feels the chill as income falls to seven-year low

Wall Street giant targets wealthy clients with a new private bank in its search for fresh sources of revenue

Simon English
Tuesday 17 July 2012 21:55 BST
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Signs of the strain being felt on Wall Street and in the City of London were seen yesterday when it emerged that even the mighty Goldman Sachs is finding life tough.

The giant investment bank's first-half revenues fell to a level not seen since 2005 as a tricky second quarter of the year took its toll.

In the three months to June, revenues across the bank's global operations were $6.63bn (£4.26bn) while profits hit $962m, less than half the $2.1bn made in the first quarter, in a clear indication of the slowdown across financial markets.

Goldman's clients have also been reducing riskier trading activities, leaving the bank searching for fresh sources of revenue, such as looking to target wealthy clients with a new private banking business that it hopes could take deposits and make up to $100bn of loans a year.

Goldman's daily value at risk – a key measure of its risk appetite – fell from $95m in the first-quarter to $92m in the second quarter. That is the lowest since 2006 when the bank began to cut back its market exposure in fear of financial strife ahead.

Revenues from investment banking – typically mergers and takeover advice – were 17 per cent lower than a year ago at $1.2bn. Goldman is still the biggest player in the field, however – recent deals on which it has worked include the $6.7bn purchase of 45 per cent of Alliance Boots by Walgreens.

Figures from the fund management arm show that even Goldman's brainboxes struggled to read the turbulent markets. Assets under management are up by $12bn to $836bn, but that is $4bn lower than it would have been but for stock-market losses. The unit has faced criticism of late from those who say its performance is average at best, and the bank is said to appreciate that it needs to improve the returns on these funds if its wealthy clients are going to be attracted to the new private bank.

Lloyd Blankfein, the chairman and chief executive, said: "During the second quarter, market conditions deteriorated and activity levels for both corporate and investing clients were lower given continued instability in Europe and concerns about global growth."

Job losses at other players in the market, especially smaller concerns, have been rife. However, Goldman staff numbers are steady at 32,300.

The bank has set aside $7.29bn for all staff pay and bonuses for the first half of the year. That means on average the staff have accrued pay of $225,000 this year so far.

If the second half of the year were the same – a far from certain outcome – employees' average pay across the bank would be $450,000 a year each.

In reality, most staff earn less than this, with the average distorted by a small number of mega-bonuses to top-producing bankers.

Goldman's status as the premier investment bank in the world, an adviser to top governments and leading business people, remains a controversial one.

It received $13bn from the US government's bailout of insurer AIG, money it claims it did not need to survive. Critics remain unconvinced.

Goldman offered evidence of its financial strength in the statement today. The bank says it has "excess liquidity" of $175bn and a tier one capital ratio of 15 per cent.

Added Mr Blankfein: "We remain focused on meeting our clients' needs, while prudently managing our capital, liquidity and risk."

He has been in charge at the bank for six years and insists he has no plans to step down. Speculation otherwise circles with regularity.

He ran into trouble in 2009 when he told an interviewer that the bank was "doing God's work".

Mr Blankfein later hinted that he was kidding.

Analysts think all investment banks, even including Goldman, are under pressure to cut costs given market uncertainty.

JPMorgan Chase, the biggest US bank, last week said second-quarter profit at its investment bank fell 7 per cent from a year earlier even as it reduced costs 12 per cent.

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