GS Goldman Sachs Group Inc

By Liz Hoffman 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 18, 2017).

Goldman Sachs Group Inc.'s investment bankers and portfolio managers drove a surprise rise in quarterly profit, compensating for another rough spell for the Wall Street firm's once-unstoppable traders.

Earnings of $5.02 a share and revenue of $8.33 billion were both higher than last year and ahead of expectations of analysts, who thought Goldman would be the only big bank to make less money than it did a year ago.

Goldman lacks the big lending and consumer businesses that buoyed larger rivals last quarter. Instead, its gains came courtesy of its merger unit and a rising stock market that boosted the value of Goldman's own investments in other companies.

Those gains were enough to overcome a 17% decline in its trading arm, which is on pace for its worst year since 2008.

Goldman is under pressure to revive its flagging trading businesses and, absent a quick turnaround there, find new areas to grow. Last month it laid out a blueprint to earn an extra $5 billion in revenue by 2020, nearly half of which it expects to come from a new focus on lending, a steadier business that will become more attractive as interest rates rise.

Still, investors and analysts remain skeptical. Shares fell 2.6% Tuesday, their biggest drop in six weeks, despite Goldman dangling the prospect of a dividend increase.

Goldman's return on equity, a key measure of profitability, was 10.9%. It and J.P. Morgan Chase & Co. were the only two of the six big U.S. banks to exceed a 10% theoretical cost of capital this quarter.

Goldman's trading declines were similar to those posted by rivals including Morgan Stanley and J.P. Morgan. Calmer markets, as well as a continued flow of investor assets to passive strategies, have kept trading volumes down and bid-offer spreads tight. Both make it hard for bank traders to profit.

Revenue in Goldman's key fixed-income division fell 26%. Of its five major product areas, only mortgages did better than a year ago. Commodities is on pace for its worst year since Goldman went public in 1999, Chief Financial Officer R. Martin Chavez said.

"We know we can do better; we know we need to do better," he said.

Goldman's merger bankers provided a big boost, posting $911 million in quarterly revenue. Several large deals were completed in the quarter, including the merger of industrial giants Dow and DuPont, for which Goldman earned a $40 million fee, filings show.

Gains from Goldman's own investments in other companies rose 51% in the quarter as stock indexes hit new records. Shareholders typically give less credit for investing gains, though, because they aren't seen as repeatable.

Analysts' reaction to the results was muted. "Don't call it a comeback," Evercore ISI's Glenn Schorr wrote. Nomura called it a "low-quality" earnings beat.

As Goldman looks less like the private partnership it once was and more like any other public company -- and one that is struggling to grow -- it is under pressure to raise the curtain that for years cloaked its inner workings.

The firm on Tuesday disclosed how much the Federal Reserve had approved in future dividend payouts and buybacks, information some peers readily offer but which Goldman hasn't shared before. Goldman may repurchase up to $8.7 billion in stock by mid-2018 and increase its dividend 5 cents to 80 cents a share next year, Mr. Chavez said.

That followed an unusually detailed presentation last month from the firm that laid out revenue growth plans.

Analysts in recent months had pressured Goldman to share its capital-return plan. Mr. Chavez said Tuesday that the firm had "extensively engaged" with shareholders in recent months on the issue.

Still, analysts want more. On Tuesday's conference call, they pushed Goldman executives for more details about the breakdown of its fixed-income trading revenue and how its new consumer-lending business is performing. Mr. Chavez promised more "continuous dialogue."

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

October 18, 2017 02:47 ET (06:47 GMT)

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