Goldman Sachs Controlling Costs Through Pay

Goldman Sachs reported better-than-expected second quarter earnings helped in large part by strict cost controls, something the firm said will continue to play a key role in its profitability in the coming quarters.

Goldman Sachs
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Goldman Sachs

“In a difficult operating environment we have two principal levers to enhance returns: expense and capital management,” said CFO David Viniar on a conference call.

To that end, the firm is looking to cut expenses by an additional $500 million dollars. Those added cuts come in the wake of a completed $1.4 billion expense initiative.

Viniar said most of the $500 million in savings will come through compensation, though not because the investment bank is cutting payrolls.

“It won’t necessarily result in lower headcount,” he said on the call. “In fact, with campus hiring coming on, we’ll probably have a higher headcount by the end of the year, but we’ll probably have a more junior- and less senior- weighted headcount.”

In the second quarter, Goldman earned $1.78 a share, down from the $1.85 a share it earned in last year’s second quarter, but well above analysts’ forecasts of $1.16 a share. Driving the better-than-expected numbers: cost controls, strength in debt underwriting and a larger-than-expected gain on the loans and securities Goldman holds on its books, better known as its Securities and Lending unit.

Still, Goldman’s return on equity, a measure of profitability, fell to 5.4 percent, well below the double-digit ROEs one typically sees from an investment bank. The uncertain environment, driven by concerns about the euro zone and weakening data from the U.S. and China, prompted the firm and its clients to dial down on risk, impacting Goldman’s profitability.

Viniar said in this kind of macro environment the bank will not have “acceptable” ROEs. Keeping the number elevated will depend more on capital management and expense controls, he said, though he warned the firm cannot cut its way to profitability. Still, it underscores why the firm is taking steps on costs.

As for capital management, Goldman bought back a more-than-expected $1.5 billion in stock in the last quarter, which helped to reduce its share count. Viniar said further buybacks are likely through year end.

— By CNBC's Mary Thompson