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Goldman Sachs profits plunge amid 1MDB corruption scandal



Goldman Sachs watched profits plummet in the fourth quarter as it prepared to pay out billions for its role in the 1MDB scandal.

The Wall Street giant announced Wednesday morning that it set aside $1.24 billion last year as it tries to settle with both US and Malaysian authorities in what could require a guilty plea for its role in the star-studded, international fraud scheme and multi-billion dollar fines.

The massive reserve took a huge chunk out of Goldman’s profits for the quarter. Despite revenue of $9.98 billion, up 23 percent for the quarter, the bank reported earnings per share of $4.69, a 22-percent drop.

Chief Executive David Solomon addressed 1MDB directly on a conference call this morning, saying “While there can be no assurance of reaching a settlement or the timing if we do, our conversations with authorities are progressing and remain active. We are working hard to bring closure to this matter as quickly as possible.”

The 1MDB fraud has an international scandal that made a celebrity out of Malaysian playboy-turned-fugitive Jho Low, who remains accused of having diverted some $4.5 billion of the government fund’s money to live a lavish lifestyle that included dating supermodels and financing Martin Scorsese’s “Wolf of Wall Street.” In a rare interview earlier this month, Low denied he was the “mastermind” of the scheme.

The Malaysian government is reportedly still looking to fine Goldman $7.5 billion, meaning the pain might be felt a little longer on Goldman’s earnings.

The legal woes come as CEO Solomon is launching a major shift in strategy away from trading – long its main profit engine – to the construction of a bigger consumer business that shields it from wild swings on financial markets.

Earlier in January, Goldman reshuffled most of its major reporting lines and, for the first time, unveiled the size of its consumer business, responding to long-standing requests for more transparency from analysts and investors.

Last week, the bank unveiled the size of its consumer business for the first time. The unit, which includes its online retail bank, Marcus as well as its credit card business, reported a 23-percent jump in revenue to $228 million during the fourth quarter.

Rivals JP Morgan Chase & Co, Citigroup and Bank of America boast of much larger consumer businesses.

“Overall, the provision missed and comp ratio was higher than expected, so results look weak this quarter excluding the equity investment gains,” said analysts at Keefe, Bruyette & Woods in a note to clients.

TRADING REBOUND

Despite a slump in profit, the bank posted robust revenue growth as three of its four main reporting lines performed strongly.

Chief Financial Officer Stephen Scherr confirmed on a call with analysts that Goldman also “exited its position in Uber in the fourth quarter.” According to multiple reports, Goldman was sitting on 10 million shares of Uber after the ride-sharing startup’s IPO. A stock sale of that size could have boosted profits for the quarter by as much as $300 million.

Revenue from global markets, which houses the trading business, jumped 33 percent to $3.48 billion, thanks partly to easier comparisons from a year earlier when financial markets were roiled by uncertainty related to trade and global growth.

Bond trading surged 63 percent to $1.77 billion.

The strong performance from trading mirrored similar trends at other major rivals – JPMorgan Chase, Citigroup and Bank of America.

The only sore spot for Goldman during the quarter was investment banking, where revenue fell 6 percent to $2.06 billion, hurt by lower M&A advisory fees, as well as a slowdown in corporate lending.

The bank’s net earnings applicable to common shareholders fell to $1.72 billion in the quarter ended Dec. 31 from $2.32 billion a year earlier. Earnings per share fell to $4.69 from $6.04.

Analysts on average had expected earnings of $5.47 per share, according to the IBES estimate from Refinitiv.

Operating expenses jumped 42 percent to $7.3 billion.

Total net revenue, however, jumped 23 percent to $9.96 billion.

With Reuters

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