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Goldman Sachs reports higher compensation ratio than analyst expectations

Goldman Sachs Group Inc. reported a higher compensation ratio — a measure of compensation expense compared to revenue than some analysts were expecting. But bank management remained positive on the company's 2019 fourth-quarter earnings call, saying the increase was going toward growth initiatives.

Compensation and benefits increased 64% in the fourth quarter of 2019, compared to the year-ago period, according to an investor presentation.

According to a note written by analysts from Keefe Bruyette & Woods, the company's quarterly compensation ratio of 30.6% was higher than the analysts' 25.0% forecast. Compensation and benefits for full year 2019 were roughly unchanged from the previous year. The full-year compensation ratio of 33.8% was also roughly flat compared to 2018, said CFO Stephen Scherr.

Employees working on growth initiatives will "by definition" produce less revenue, Scherr said. "That compensation dollar is not producing an equal amount of revenue as it would in other areas," he said. "It will as those businesses grow and mature."

"We view the compensation ratio metric as less relevant to the firm as we build new scale platform businesses," Scherr said.

While the company reduced compensation across certain business lines, that was negated by an increase in compensation for the company's growth initiatives. Non-compensation expenses rose compared to 2018 due to litigation expenses and investment in growth, including the bank's online deposit-gathering platform Marcus, the new Apple Card, transaction banking and the company's acquisition of United Capital Financial Advisers LLC, according to Scherr.

"My expectation around non-compensation expense [excluding] litigation is that it would run roughly flat in 2020 relative to where we are," Scherr said.

Although the company's stock initially fell on the earnings report, opening at $241.56 per share on Jan. 15, down from $245.53 at market close Jan. 14, it immediately began to climb, reaching $248.04 per share at 12:30 p.m. ET on Jan. 15.

"We were expecting [Goldman Sachs] to control the comp ratio more than management did, and we look through the beat on equity investments," the analysts from Keefe Bruyette & Woods wrote in their note.