GS Goldman Sachs Group Inc

By Liz Hoffman 

Goldman Sachs Group Inc.'s third-quarter profit fell 26% from a year ago, hit by a slowdown in deal-making and losses on the bank's stakes in companies.

The bank on Tuesday reported $1.88 billion in net earnings on $8.32 billion in revenue, roughly in line with what analysts had expected. But its return on equity -- a measure of how profitably it invests shareholders' money -- was just 9%, lower than peers, as it continues to pour money into new initiatives such as consumer banking, corporate-cash management and ultrafast trading systems.

Goldman was one of four big banks to report third-quarter earnings Tuesday. JPMorgan Chase & Co. posted its seventh straight quarter of higher profits, sending its stock price to a record. At Citigroup Inc., a lower tax rate helped boost its profit. Wells Fargo & Co. took a $1.6 billion litigation charge stemming from its long-running fake-accounts scandal.

The two Federal Reserve interest-rate cuts this summer haven't yet hit banks' profits, though executives warned a prolonged period of lower rates would hurt their businesses. For now, mortgage lending surged as homeowners rushed to refinance and trading fees rose on money on products tied to interest rates, such as swaps and mortgages.

Bank of America Corp. will report earnings on Wednesday and Morgan Stanley on Thursday.

Under Chief Executive David Solomon, Goldman is trying to broaden out beyond its Wall Street roots. It is building new businesses in consumer banking and cash management, and recently launched a credit card, its first, in partnership with Apple Inc.

Its turnaround is slow and expensive. Goldman said it has spent $450 million this year on growing online consumer bank Marcus, launching the Apple card, and integrating a wealth-management firm that it bought this summer. Non-compensation costs rose 16% in the quarter, which the bank balanced out by cutting the money it sets aside for year-end bonuses.

"When you say 'a long time,' that's a subjective word," Mr. Solomon said in response to a stock analyst's question about when Goldman's investments would pay off. He said some of the projects should start bearing fruit within three to five years, and has promised an in-depth presentation to investors early next year.

Goldman's revenue from mergers and underwriting securities offerings fell 18% as the initial-public-offering market quieted and fewer corporate deals were completed. Goldman is the leading stock underwriter this year, according to Dealogic, but the IPO business -- worth $9 billion in fees across Wall Street last year -- looks threatened after a few disastrous debuts.

Peloton Interactive Inc., maker of video-streaming stationary exercise bikes, and SmileDirectClub Inc., an at-home-teeth-straightening startup, both stumbled in their IPOs, led respectively by Goldman and JPMorgan. WeWork's parent company scrapped its offering entirely.

Goldman took a $267 million hit on its stakes in Uber Technologies Inc., electronic-trading venue Tradeweb Markets Inc. and other companies, and took a paper loss of $80 million on a small stake in WeWork. Revenue from the firm's investing activities fell 40% to a three-year low.

Revenue from fixed-income trading was up 8% in the quarter but was down through the first nine months of the year from 2018 and far off its peak profitability in the years immediately following the financial crisis. Goldman has been cutting down on the money available for its traders to put to work, shifting it to initiatives that are more profitable, such as money management, or offer more growth opportunity, like credit cards.

JPMorgan's fixed-income revenue was up 25%, while Citigroup's was flat.

Goldman now oversees $1.8 trillion in its asset-management arm, up 6% from June 30. It has been trying to grow its business advising big insurers and pensions on their portfolios, and rely less on its mutual funds, an industry where prices are under pressure

In a regulatory filing, Goldman said it was in talks with "certain governmental and regulatory authorities" to resolve a yearslong investigation into its dealings with a Malaysian government fund. Goldman is expected to pay a hefty fine, including to the U.S. Department of Justice, for overlooking red flags in its dealings with the fund, known as 1MDB.

It temporarily stopped repurchasing its own shares until it had disclosed the talks, but Chief Financial Officer Stephen Scherr said Tuesday it had resumed the buybacks, a key way that banks reward stockholders.

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

(END) Dow Jones Newswires

October 15, 2019 14:49 ET (18:49 GMT)

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