The bank everyone loves to hate, Goldman Sachs (NYSE: GS ) , reported first-quarter earnings that, if not exactly worth writing home about, at least beat analysts' expectations -- resulting in an increased dividend for shareholders. At the same time, stress-test underachiever Citigroup (NYSE: C ) is warning that a higher dividend might not be in the cards for 2012, despite decent first-quarter earnings, and suffers a shareholder revolt in the process.
A tale of two banks
If it wasn't exactly the best of times, the times were at least better than expected. Goldman Sachs reported earnings per share of $3.92 in the first quarter, easily beating the $3.55 per share analysts had called for. This better-than-expected performance is attributed to increased demand in three unexpected areas: bond trading, debt underwriting, and derivatives used for hedging.
Offsetting these gains and contributing to the overall decline in earnings were decreases in the fixed-income, currencies, and commodities areas of the bank, where net revenues fell 20% year over year. To be fair to Goldman, the first quarter of last year was a banner one for fixed income at investment banks in general, setting a high standard to hit this time around. Adding to the bank's overall decline was a 9% drop in investment banking revenue.
Despite this less-than-banner first quarter, the board approved an $0.11 dividend increase -- taking the bank's quarterly distribution from $0.35 to $0.46 per share.
The shareholders strike back
It's old news now that Citibank failed the most recent round of the Federal Reserve's stress tests: a rigorous challenge that included a 50% decline in the stock market, 13% unemployment, an 8% drop in gross domestic product, low interest rates, and a European market crisis. Under these simulated conditions, banks had to show they could maintain a core Tier 1 capital ratio above 5% of risk-weighted assets.
Nineteen banks in all were tested, including Goldman Sachs, Morgan Stanley (NYSE: MS ) , Bank of America (NYSE: BAC ) , and Wells Fargo (NYSE: WFC ) . Four failed. Of the 15 that passed, which included these three, some came through strong and others just squeaked by. Citibank itself just missed the target capital ratio. As a result, it was not able to raise its dividend -- something shareholders had, of course, been hoping for.
Hope remained, however, that the bank would be able to retest soon and raise its dividend sometime in 2012, beyond the current meager $0.01 per share. Citibank CEO Vikram Pandit, however, seemed to dash those hopes when he recently said that "waiting until the 2013 submission" to the Federal Reserve to raise the dividend was an option.
The day after Pandit's dividend musings, shareholders proceeded to firmly dash Pandit's hopes of a pay raise in 2012, rejecting the board's pay plan in a vote at the bank's annual meeting. Pandit made $15 million last year and was in line to receive millions more this year. All of this happened after a quarter in which Citibank increased its net income from $3.2 billion to $3.4 billion year over year. Total revenue was up as well, to $20.2 billion, or 1%. Not astonishing numbers, but not terrible, either.
Pay for performance, or pay the price
On the Goldman conference call, CFO David Viniar attributed the bank's weak -- though better than expected -- overall performance to a decrease in clients' general appetite for risk. As bonds are traditionally seen as conservative investments, and credit default swaps are a common way to hedge, a decreased appetite for risk might explain the "increased demand in bond trading and derivatives used for hedging."
Goldman CEO Lloyd Blankfein took more of a silver-lining approach to first-quarter numbers: "Because client activity remains relatively low in certain areas, especially in parts of investment banking, we believe that our mix of businesses gives the firm significant room for revenue growth."
The fact is, investment banking as we know it isn't really going anywhere anytime soon. The Dodd-Frank financial-reform bill of 2010 was supposed to tighten the reins on the big banks, and the Federal Reserve stress tests were supposed to sort out and shore up the banking system, but the consensus opinion is that the envisioned strict regulation of the banks won't be devastating because it has been significantly watered down.
As such, Goldman -- the too-big-to-fail bank that came close to the edge of oblivion in 2008 and 2009 -- probably does have "significant room for revenue growth" because of its "mix of businesses" and will therefore continue to find ways to make money in the years to come, much as it always has, whether clients' appetite for risk is large or small. In the meantime, Goldman shareholders can enjoy their dividend increase.
Citibank, with a better quarter behind it than Goldman, still couldn't manage to raise its dividend and stave off a shareholder revolt. Of course, Citibank will eventually get its act together, pass the Federal Reserve's stress retest, and raise its dividend. Whether Pandit will be around when that day comes is another matter altogether. Blankfein, to his and Goldman's credit, recently took a significant pay cut, reflecting the bank's lack of success.
Meanwhile, "pay for performance" or "pay the price" is a lesson Pandit is learning the hard way, and a lesson shareholders are getting better at administering. Too-big-to-fail banks aside, learn about some delightfully straightforward bank stocks, including one Warren Buffett could have loved in his earlier years, in our free report, "The Stocks Only the Smartest Investors Are Buying." Download your copy while it's still available.