Eight years ago, Goldman Sachs Group Inc. bankers sold bonds on behalf of a little-known Malaysian investment fund.
On Wednesday, the fallout from that deal wiped out about 13% of the bank’s 2019 profits and darkened otherwise strong results. Goldman socked away an extra $1.1 billion late last year to help pay for an expected settlement with regulators, who allege the bank overlooked signs of corruption at the Malaysian fund, known as 1MDB, in pursuit of fees.
The Wall Street Journal previously reported that Goldman is negotiating to pay the U.S. Justice Department a fine of about $2 billion and plead guilty to violating antibribery laws.
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The legal reserves pushed Goldman’s return on equity—a closely watched measure of shareholder value—to 10% for the year, the worst among big banks that have reported financial results so far. Costs also rose as Goldman spends heavily on new initiatives, such as consumer banking and wealth management.
The result: Goldman’s annual profit fell 19% even as revenue held steady.
The bank hasn’t gotten the boost from consumer spending and borrowing seen by JPMorgan Chase & Co. and other big Main Street banks. It remains more dependent on traditional Wall Street operations of deal making and securities trading, which held up well in the quarter but where growth is harder to come by.
In the fourth quarter, Goldman’s investment bankers posted their second-best quarter ever and its struggling bond-trading arm showed signs of life. But both were overshadowed by the 1MDB legal charge and higher expenses. Goldman fourth-quarter profit fell 24% to $1.92 billion, even as revenue rose to $9.96 billion.
The results provide a creaky dais for Goldman’s coming investor day on Jan. 29, when Chief Executive David Solomon will lay out his plans to get the firm growing again. He has promised new financial targets that investors will be able to judge his administration by.
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A year into the job, Mr. Solomon and his lieutenants are moving quickly—and spending heavily—to reshape its existing businesses and add new ones they hope will allow Goldman to better compete with more balanced rivals and weather tough markets. They bought a wealth manager, launched a credit card with Apple Inc., are raising new private investment funds and are building a corporate cash-management business.
Those moves are expensive. They also require a delicate balance of investing for growth without choking off existing businesses or irking rainmakers. Chief Financial Officer Stephen Scherr said Wednesday that the firm had cut bonuses in some divisions to fund new businesses such as consumer banking.
Goldman’s shares are up about 20% since October but still trade at a discount to bigger rivals like JPMorgan and Bank of America Corp. JPMorgan reported record annual profits on Tuesday, while quarterly profits fell at Bank of America, which is keenly sensitive to interest-rate cuts.
Goldman’s securities-trading business rebounded from a weak end to 2018 to post 33% higher revenue in the fourth quarter. The gains were even sharper in bond trading, where Goldman once minted billions but has struggled since the financial crisis.
Shares gave up earlier gains to fall to $245.21, down 0.2%. For the year so far, Goldman shares have risen about 6.7%, outperforming other large banks.
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Write to Liz Hoffman at liz.hoffman@wsj.com
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