Goldman Sachs earnings fall as trading revenues halve

Via Bloomberg:

See also financial statements

Goldman Sachs Group Inc. said second-quarter profit dropped 82 percent, missing analysts’ estimates on a slide in trading revenue, five days after settling U.S. regulators’ fraud allegations. Revenue and earnings were the lowest since the fourth quarter of 2008.

Net income fell to $613 million, or 78 cents a share, from $3.44 billion, or $4.93, a year earlier, New York-based Goldman Sachs said in a statement today. The average estimate of 21 analysts surveyed by Bloomberg was for earnings of $1.99 per share, with estimates ranging from 77 cents to $4.34. Some of the analysts excluded costs of the settlement.

Goldman Sachs fell 0.6 percent in New York trading as a 36 percent drop in revenue exceeded analysts’ estimates. The bank’s bigger competitors, including JPMorgan Chase & Co., also reported lower trading revenue last week as market gyrations reduced clients’ willingness to take on risk. Concern that the U.S. economic rebound will stall and reform legislation will crimp profits at finance companies have weighed on their stocks.

“It was a pretty slow quarter,” said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $800 million including shares of JPMorgan and Bank of America Corp. “In the first quarter they made a lot of money on the trading side of things and this quarter they did not.”

Shares Decline
Goldman Sachs fell 90 cents to $144.78 in New York Stock Exchange composite trading at 10:04 a.m. The stock was down 14 percent this year through yesterday, while the S&P 500Financials Index, which tracks the performance of 80 financial company shares, was down 2 percent this year.

Revenue dropped to $8.84 billion, 31 percent below the first quarter and down 36 percent from the second quarter of last year. The biggest component, revenue from trading fixed- income, currencies and commodities, fell to $4.4 from $7.39 billion in the first quarter and $6.8 billion a year earlier.

“The market environment became more difficult during the second quarter and, as a result, client activity across our businesses declined,” Lloyd Blankfein, Goldman Sachs’s chairman and chief executive officer, said in the statement.

Costs during the quarter included a $600 million charge for a tax levied by the U.K. government on bonuses paid to bank employees last year as well as a $550 million cost from the SEC settlement. Excluding those two costs, earnings per share would have been $2.75 per share. That’s still the lowest since the fourth quarter of 2008.

Operating Expenses
Total operating expenses dropped to $7.39 billion from $8.73 billion in the same period a year earlier as the company reduced compensation costs to $3.8 billion from $6.65 billion.

Goldman Sachs set aside $9.3 billion to pay each of its 34,100 employees in the first half of the year, or an average of $272,580 per person. That compares with $11.4 billion in the first half of 2009, which equated to $364,134 for each of the firm’s 31,200 employees at the time.

The ratio of compensation to net revenue fell to 43 percent in the first half from 49 percent in the first half of 2009.

Goldman Sachs’s shares rebounded last week after the firm settled with the SEC over its 2007 sale of a collateralized debt obligation. The cost was lower than the $1 billion some analysts had estimated and the settlement didn’t require any management changes. Analysts slashed earnings estimates in recent weeks on concern market declines would hurt trading revenue as well as on costs related to the settlement and the U.K.’s bonus tax.

Getting Pessimistic

“People have gotten overly pessimistic on Goldman,” Charles Peabody, an analyst at Portales Partners LLC, said before the earnings were released. “We don’t believe they’ve lost big chunks of their client base, and we do believe in their risk-management capabilities.”

Shares of some of Goldman Sachs’s biggest rivals fell last week after they reported revenue that was lower than investors predicted. JPMorgan Chase’s second-quarter net revenue dropped 9 percent from the first quarter as sales at the investment-bank unit slid 24 percent. Bank of America Corp.’s revenue fell 9 percent as global banking and markets results tumbled 38 percent.

Morgan Stanley, which was the second-biggest securities firm after Goldman Sachs before both converted to banks in 2008, is due to report earnings tomorrow.

The second-quarter annualized return on common equity, a measure of how well the firm reinvests earnings, declined to 7.9 percent in the quarter from 20.1 percent in the first quarter and 23 percent in the same quarter a year earlier. Book value per share climbed to $123.73 from $122.52 at the end of the first quarter.

Equity Trading
Equity trading revenue declined 49 percent to $1.21 billion from $2.35 billion in the first quarter. Principal investments, which includes gains and losses from Goldman Sachs’s stake in Industrial & Commercial Bank of China Ltd. as well as stakes in other companies and real estate, provided a $943 million gain in the quarter.

Investment-banking revenue dropped 23 percent to $917 million from the first quarter as advisory fees gained 2 percent, debt underwriting revenue declined 36 percent and equity underwriting revenue decreased 40 percent.

Investors and analysts said before the earnings that they’re keen for news on how the settlement, which imposes changes to the way Goldman Sachs sells mortgage-related securities, and the wider financial regulatory reform bill passed by the U.S. Senate last week will affectearnings.

Taking Risks
“I do think there will actually be business reforms where their risk-taking might be reined in,” said Portales Partners LLC’s Peabody. “I don’t think there’s any question that Goldman did play in the grey areas” and curbing that “reduces your opportunities.”

Revenue from asset management rose 3 percent to $976 million from $946 million in the first quarter as assets under management fell 5 percent to $802 million from $840 million in the first quarter. Securities services, the division that includes fees charged for providing services to hedge funds, reported $397 million in revenue, up from $395 million in the first quarter.


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