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According to Reuters, The Goldman Sachs Group Inc. ( GS - Analyst Report ) is moving ahead with its cost cutting plan. To start with, the bank has sacked employees in its trading and investment banking divisions.
In 2011, Goldman reduced 2,400 positions, out of which 1800 layoffs took place in March 2011 as part of its annual review process. The recent announcement of job cuts also comes under Goldman's annual retrenchment of workers, who performed below expectations.
According to the source, workers who failed to meet performance targets are getting sacked. Moreover, workers are being replaced by machines or low-paid employees to curtail the expenses.
The bank is working on its plan to substitute staffs in high-cost areas like New York and New Jersey by less costly workers in Salt Lake City. More layoffs are anticipated as the company aims to shrink costs and increase its profitability.
In January, Goldman reported a 67% fall in its 2011 earnings compared to the prior year. The company has targeted approximately $1.4 billion in run-rate compensation and non-compensation expense reductions through diminutions in total number of employees and planned expenditures. The firm is trying to recoup the losses it has incurred by boosting its revenues and reducing its expenses.
Goldman operates through four main divisions, including sales and trading, investment banking, wealth management as well as investing and lending. The recent job cuts are expected to occur in all divisions.
In 2011, with 33,300 employees, Goldman recorded $28.8 billion in revenue and $2.5 billion in profit, which resulted into about $865,195 revenue per employee and $75,375 profit per employee. These reported figures represented 25% decline in revenue per worker and 71% decline in profit per worker, when compared with the data of 2005. Therefore, such fall remains a matter of concern for the bank.
Among other Wall Street bigs on the same path as Goldman, Morgan Stanley ( MS - Analyst Report ) has laid off 887 financial advisers as part of its cost-cutting effort, including mostly those employees who failed to meet the revenue targets in its wealth-management business throughout 2011.
Following the slowdown in economic and market activity in 2011, many large Wall Street banks have started reducing their workforces to cut costs. Further, some large Wall Street banks are laying off their employees due to weak trading volumes and stringent regulations on some parts of their business.
Overall, until revenue generation revives, a hideous cost-to-income ratio will continue to force many more banks to reduce their costs through job cuts as they need to maximize profits in order to boost capital ratios. Of course, everyone will now keep their eyes on the weak firms that have not yet announced anything related to job cuts.
We believe that the present job cuts will enable Goldman to reduce expenses, alleviating the pressure on the bottom line. The job cut initiative explains Goldman’s effort to improve profitability amid revenue headwinds attributable to a weak economy and stricter capital requirements by regulators.
Goldman currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long term Neutral recommendation on the stock.
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