Goldman Sachs Profit Jumps in First Quarter -- 3rd Update
April 17 2018 - 2:29PM
Dow Jones News
By Liz Hoffman
Goldman Sachs Group Inc. reported sharply higher profit on
Tuesday, looking more like the balanced firm Chief Executive Lloyd
Blankfein has been working to build in the wake of the financial
crisis.
The Wall Street firm's profits rose 26% from a year ago, the
biggest gain among the five big U.S. banks to have reported
quarterly earnings so far. Morgan Stanley reports Wednesday.
Goldman's traders broke out of their funk, riding renewed
volatility in the markets to a three-year revenue high. A lower
firmwide tax rate helped results, too.
Gains came from nearly every one of the firm's businesses,
including lending and asset management, two steadier, higher-return
businesses that are far from Goldman's roots as a Wall Street
powerhouse. Debt underwriting, an area Mr. Blankfein has
specifically targeted for growth, had its second-best quarter on
record.
All in, the firm's return on equity, a closely watched measure
of profitability, stood at 15.4% in the quarter, its highest since
late 2012.
"All this positivity is driving me crazy," Mr. Blankfein joked
in a Tuesday morning call with managing directors, according to
attendees. "We've seen false dawns before."
Shares rose initially but fell more than 2% after Chief
Financial Officer Martin Chavez said on the firm's earnings call
that Goldman wouldn't buy back any stock in the second quarter.
Instead, it would plow its capital back into its business.
The firm in September outlined a plan to add $5 billion in
annual revenues by 2020. Supporting new initiatives -- many of
which won't be profitable for years -- requires funding.
Goldman has spent more than $500 million on its new retail bank,
hiring coders and making Silicon Valley acquisitions. It is
exploring building a suite of commercial-banking and
cash-management products, The Wall Street Journal reported earlier
this month.
It is also offering more capital to its trading clients. One
common measure of risk-taking, known as value-at-risk, rose sharply
in the quarter.
The lack of buybacks went over poorly among investors who would
rather have their returns in the form of cash than wait to see if
Goldman's executives can succeed on new initiatives, many of them
in unfamiliar terrain.
"We've been transparent about our growth plans," Mr. Chavez
said. "There is a clear demand from clients for our balance sheet,
which provides an opportunity to deliver attractive returns."
Trading revenue rose 31% to its highest level in three
years.
Goldman's fixed-income division, which stumbled badly in 2017,
reversed course in the first quarter as markets came alive, up 23%.
Stock-trading revenue rose 38% as fears of a trade war and the
tumult in technology stocks sent the Dow flying in March.
Investment banking, the business of arranging mergers and
helping companies raise money, reported a 5% increase in revenue
from a year ago. A rise in underwriting compensated for a decline
in merger fees.
The firm also slipped from its No. 1 perch in announced M&A,
potentially worrisome given the importance of the business to
Goldman's revenue and reputation. Executives said its pipeline of
unannounced deals had grown from year-end.
Goldman is hiring rainmakers and chasing after deals it once
deemed small-time in an effort to grow its already dominant M&A
franchise. Mr. Chavez said Tuesday that Goldman has added 500 new
investment-banking clients, halfway to its goal of 1,000.
A surprise bump came from the firm's portfolio of principal
investments, which includes stakes in richly valued startups
including ride-sharing app Uber Technologies and music-streaming
service Spotify AB.
Revenue rose 34% as Goldman sold or marked up the carrying value
of investments, including credit-bureau TransUnion,
artificial-intelligence firm Kensho Technologies Inc. and
Spotify.
Investors tend to discount these revenues because they can swing
around from quarter to quarter. And Goldman's asset-management arm
relied heavily on incentive fees, which typically are tied to
profits in the firm's private-equity arm. That raises questions
about whether Goldman can repeat its first-quarter results.
"Obviously it won't always be this good, but sure is cool to see
a good old Goldman beat in a quarter that was far from the perfect
backdrop," analyst Glenn Schorr wrote in a note to clients.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
April 17, 2018 14:14 ET (18:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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