NEW YORK (
(GS - Get Report) has created an implementation team to prepare the bank for the phase-in of the Volcker Rule, which seeks to limit banks' ability to invest their own capital in proprietary trading and private equity funds.
Goldman Sachs CFO Harvey Schwartz said on a conference call with investors that the bank has created a "Volcker implementation team" that will help it adapt to new regulations now that the regulation has been signed into a law.
Already, Goldman Sachs has divested businesses it called "bright line proprietary trading," and meanwhile, many of the firm's biggest legacy private equity funds are in a run-off mode.
Still, as of the third quarter Goldman Sachs held nearly $60 billion in assets within its so-called Investing & Lending division, which houses branches of the bank that invest in alternative credit, private equity and hedge fund assets.
The Volcker rule seeks a 3% cap on any bank's investment in private equity and hedge funds relative to its Tier 1 capital, a regulation that would appear to handcuff Goldman Sachs. Of course there will be ways to mitigate the impact of Volcker, nevertheless, Goldman stands out as the bank most affected by the regulation.
More than any other bank, Goldman Sachs may be most exposed to the Volcker Rule. The firm's Investing & Lending unit has been the biggest driver of pre-tax profits in 2013.
In the fourth quarter, the Investing & Lending unit earned in excess of $2 billion in revenue, significantly ahead of consensus of $1.4 billion in revenue. Overall, Goldman's Investing & Lending division generated over $7 billion in net revenue, a 19% increase from 2012. The unit was Goldman's second fastest growing business by revenue in 2013.
Schwartz said that the firm is working on figuring out ways to continue investing in private equity structures in a "Volcker compliant manner." He also noted that Goldman may be able to find ways to invest in alternative assets off of its balance sheet.
When pressed by analysts, Schwartz wasn't willing to project Volcker's impact on the firm's revenues or expenses. "At this stage it is way too early to quantify any impact," he said.
The Volcker Rule may also not be as harsh as some might have expected. "At this stage, it doesn't look like a revenue impacting item," Schwartz said.
For instance, the rule is unlikely to impact the ability of the bank's sales and trading divisions to hedge their market-making activities, according to Schwartz. He said the firm didn't see anything in the rule that would impact Goldman's ability to hedge its trades.
"Hedges are hedges," Schwartz said.
The bank's fixed income, currency and commodity sales and trading division earned $1.72 billion in revenue, slightly beating estimates of $1.7 billion that reflected a strong rise from the third quarter but a 15% drop from year-ago levels.
Equities sales and trading revenue of $1.62 billion also slightly beat consensus estimates, indicating that the bank's trading division performed well in the fourth quarter.
Total sales and trading revenue at Goldman Sachs of $15.7 billion in 2013, however, represented a 13% year-over-year decline.
Goldman Sachs earned $4.60 in fourth quarter earnings per share on revenue of $8.78 billion, significantly beating Wall Street consensus estimates of $4.18 a share on $7.75 billion in revenue. Credit Suisse and Keefe Bruyette & Woods both forecast Goldman's fourth quarter EPS at $4.40 a share, in January reports.
Those earnings indicated that Goldman Sachs was able to take advantage of recovering confidence in capital markets and corporate C-Suites. However, they also continued to point to the bank's reliance on earnings from businesses that may become constrained by regulations.
Investment Banking Strength
Goldman Sachs investment banking capitalized on recovering confidence among its corporate clients, helping to drive $1.72 billion in the fourth quarter net revenue, ahead of most estimates, and 47% higher than year-ago levels.
KBW analyst Fred Cannon forecast Goldman to generate $1.72 billion in investment banking revenue on particularly strong equity underwriting and M&A advisory performance. Overall, the unit's $6 billion in sales reflected 22% growth through 2013, the representing the best revenue growth across the firm.
Goldman Sachs CFO Harvey Schwartz attributed strong investment banking results to a robust IPO calendar, higher M&A volumes and continued strength in debt financing.
"It shouldn't be lost on us that the long-term trend is slowly, steadily improving," Schwartz said of corporate activity and the global economic outlook in 2013.
"We feel very good about our franchise position," he added.
Reserve for Litigation Rises
Compensation and benefits expense at Goldman Sachs were $12.61 billion for 2013, 3% lower than 2012. Non-compensation expenses were $9.86 billion for 2013, 2% lower than 2012.
Goldman did say its non-compensation expenses for the fourth quarter rose 40% from the third quarter, as it upped its legal reserves. CFO Schwartz said on a conference call with investors that litigation is hard to predict, however, he did point analysts to a $4 billion item the bank had previously disclosed.
Goldman Sachs shares were trading lower by 1.5% in early Thursday trading at $176.06.
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-- Written by Antoine Gara in New York