GOLDMAN Sachs is expected to reveal a sharp drop in revenues and a gentler decline in pay in its second-quarter results tomorrow.
Analysts have estimated that the bank’s ratio of total compensation to revenues will jump as slow trading volumes eat away at the top line.
Sandler O’Neill analyst Jeff Harte forecasts revenues of $8.7bn (£5.4bn) – down 27 per cent compared to $11.9bn the first quarter – with 45 per cent, or $3.9bn put aside for pay, including salaries, bonuses and other benefits.
BernsteinResearch’s Brad Hintz is more pessimistic, predicting $7.48bn in top line income and $3.26bn earmarked for compensation, a ratio of 44 per cent.
“Investing in Goldman Sachs is not for the faint of heart,” says Hintz, adding that regulatory pressures could see the bank cut headcount and shift from a model based on investing its own capital by prop trading to one more focused on asset-management for third parties.
Harte also predicts that compensation costs will have to come down: “We note that a three per cent reduction in the compensation ratio of its trading business will allow Goldman Sachs to beat its cost of capital in these units under Basel III capital rules,” he says.
Overall, investment banks have had a tough quarter due to the collapse of their “flow monster” business model, with investors hoarding cash instead of trading.
Many analysts have cut their earnings forecasts in the last two weeks as banks have confirmed a steady drip of news they will be forced to lay off hundreds, if not thousands, of staff.