Goldman Posts Surprise Profit Gain on Trading, Deal Revenue

Jul 15, 2014 1:11 pm ET

(Updates with equity results in the seventh paragraph.)

July 15 (Bloomberg) -- Goldman Sachs Group Inc. reported a surprise increase in second-quarter profit as fixed-income revenue fell less than many analysts projected and investment- banking fees rose.

Net income climbed 5 percent to $2.04 billion, or $4.10 a share, from $1.93 billion, or $3.70, a year earlier, the New York-based company said today in a statement. That beat the $3.09 average estimate of 25 analysts in a Bloomberg survey.

Chief Executive Officer Lloyd C. Blankfein, 59, has pledged not to overreact to a trading slump that’s now in its fifth year as he positions the firm to pick up market share from other banks that are pulling back. Blankfein is also relying on underwriting stocks and bonds, which accounted for 14 percent of revenue in the second quarter, the highest portion since 2000. First-half investment-banking fees climbed to a record.

“We’ve got a strong beat here, primarily revenue-driven, and Goldman is a little more resilient than expected,” Devin Ryan, an analyst at JMP Group Inc. in New York, said in a telephone interview.

Goldman Sachs climbed 1 percent to $168.59 at 12:42 p.m. in New York. The stock dropped 5.8 percent this year through yesterday, making it the worst performer in the Dow Jones Industrial Average.

Revenue rose 6 percent to $9.13 billion. Compensation, the firm’s biggest expense, climbed to $3.92 billion, or 43 percent of revenue, the same percentage as a year earlier.

Equity Investments

The biggest surprise compared to many analysts’ estimates was the gain on the firm’s equity investments in its Investing and Lending segment, which totaled $1.25 billion. That was almost double the $650 million expected by Barclays Plc’s Jason Goldberg.

While Chief Financial Officer Harvey Schwartz said that business has repeatedly been a strong performer, Matthew Burnell, an analyst at Wells Fargo & Co., said investors value such revenue at lower multiples than that of other units because it’s so unpredictable.

“They had a very good quarter in principally selling some assets in their private-equity portfolio,” said Kenneth Leon, an analyst who covers the financial industry for S&P Capital IQ. “It was the lumpy transactions that really made the revenue stand out.”

FICC Results

Fixed-income, currency and commodity trading revenue was $2.22 billion, surpassing estimates of $1.79 billion from Brad Hintz, an analyst at Sanford C. Bernstein & Co., and $2.1 billion from Goldberg at Barclays.

The 9 percent second-quarter drop in bond-trading revenue, excluding an accounting adjustment, beat the 24 percent decline predicted by Burnell. JPMorgan Chase & Co. today posted a 15 percent drop in fixed-income revenue.

Goldman Sachs’s revenue from the equities division declined 11 percent from a year earlier to $1.63 billion, excluding accounting adjustments. That compared with Hintz’s $1.54 billion estimate and Goldberg’s $1.71 billion projection.

While the trading performance was better than expected, it still marked the lowest first-half revenue since the financial crisis in 2008. The bank earned a 10.9 percent return on equity in the quarter, a third of the level before the financial crisis.

‘Abnormal’ Trading

Goldman Sachs President Gary Cohn, 53, said in May that the current environment is “abnormal” and features trading clients that are the least active in years. He noted that the 10-year Treasury yield maintained the smallest range in 35 years in the three months ended in May.

“If markets never move or don’t move, our clients really don’t need to transact,” Cohn said.

The firm has cut 10 percent of its fixed-income workforce since 2010 and reduced the risk-weighted assets in that business by $90 billion in the past two years. It has also relied on other businesses for growth.

Second-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, climbed 15 percent to $1.78 billion. That compared with JPMorgan’s $1.77 billion in investment-banking revenue and Citigroup’s $1.34 billion.

The Goldman Sachs figure included $506 million of financial-advisory revenue, including fees for takeover advice, an increase of 4 percent. Revenue from underwriting climbed to $1.28 billion in the quarter, including $730 million from debt underwriting and $545 million for equity offerings.

M&A Advice

Goldman Sachs held the top spot among arrangers of global equity, equity-linked and rights offerings in the first half, according to data compiled by Bloomberg. It ranked first in advising on announced mergers and acquisitions and fifth in underwriting U.S. bonds, the data show.

Investing and Lending posted total second-quarter revenue of $2.07 billion, up from $1.42 billion a year earlier.

The firm has about $8 billion of stakes in private-equity funds that it must cut to comply with the Volcker Rule, which limits the amount banks can invest in such funds, Schwartz said.

Revenue from asset management, run by Timothy O’Neill and Eric Lane, rose 8 percent to $1.44 billion. Total assets under supervision climbed $59 billion during the quarter to $1.14 trillion.

--With assistance from George Rosa Acosta in New York.