GS Goldman Sachs Group Inc

By Liz Hoffman 

Goldman Sachs Group Inc.'s bond traders laid another egg in the second quarter.

Goldman, once the fiercest trading shop on Wall Street, reported a 40% decline in its all-important fixed-income trading business that placed it at the back of the pack among big U.S. banks to report quarterly results.

The poor showing followed an equally bad first quarter, and drowned out a surprise earnings beat on Tuesday, which Goldman owed to gains in its portfolio of private-equity stakes.

The firm, run by Chairman and Chief Executive Lloyd Blankfein, reported earnings of $3.95 a share on revenue of $7.89 billion, both better than analysts had forecast. Yet shares fell 2% as investors looked through to shakiness at Goldman's core, tumbling further as Chief Financial Officer R. Martin Chavez addressed concerns on a conference call.

"We didn't navigate the market as well as we want to," he said, echoing nearly verbatim comments he made three months ago about the fixed-income business. "Everyone in our business is intently focused on this topic and at a granular, molecular level are working on it, as are all of us in the leadership team."

Goldman's traders have struggled to find their footing as markets churn quietly higher and trillions of dollars shift from human portfolio managers to algorithms and index funds that don't try to beat the market, but simply match it.

That has led to less demand for Goldman's specialty: exotic trading products that allow investors to make one-of-a-kind bets on asset prices.

The firm blamed "a challenging environment characterized by low levels of volatility, low client activity and generally difficult market-making conditions," and it cited weakness in nearly all the major products it sells, from interest-rate derivatives to credit products.

The results will likely amplify criticism that Goldman hasn't responded quickly enough to changing investor preferences and market conditions. A rejiggering of the division's leadership last fall failed to jolt the desk from its malaise, which culminated in having its revenue surpassed in the first quarter by Morgan Stanley, Goldman's archrival historically weaker in debt trading. Morgan Stanley reports its earnings Wednesday.

Saving the quarter for Goldman was its portfolio of private company stakes, which rose 88%. Goldman has held on more tightly to merchant banking than rivals, and rising markets push up the prices for the shares it holds.

But investors tend to discount the lumpy revenues in the unit. Charles Peabody of research firm Compass Point called Goldman's results a "low quality beat ... aided by [private equity] gains that the marketplaces won't pay up for."

Goldman's trading business is more reliant on swashbuckling stockpickers than peers, a strategy that paid off in years past but now puts the bank on the wrong side of huge shifts in the money-management industry. As more money moves from actively managed funds to passive ones, trillion-dollar pools of assets trade less frequently and generally need less-complex and fewer services.

Goldman has made a push over the past year or so to win more business from corporate treasurers and passive managers, as well as to improve client service and better track where top clients are spending their trading commissions and fees.

So far, it hasn't worked. Goldman's six-month trading revenue fell 10% from last year, dropping to the lowest level in Mr. Blankfein's decade-long tenure. Commodities trading, a business he once ran, had its worst quarter in Goldman's 17 years as a public company, as the firm struggled to adequately hedge its inventory.

Goldman has seen a stream of departures among rank-and-file fixed-income salespeople and traders in recent months. Continued woes in the division are likely to ramp up pressure for another shake-up.

"Goldman was the unbeatable firm, the smartest guys on the block," Octavio Marenzi, CEO of capital markets consultancy Opimas, said of the business's results. "They've lost that luster."

The story was better in equities, which posted its best quarter in two years. Revenue of $1.89 billion increased 17% from a year ago. A surprising bright spot was cash stockbroking, which has faced a yearslong decline as electronic trading gutted fees.

Investment-banking reported a 3% decline in revenue from a year ago, with merger fees down 6% and stock and debt underwriting basically flat.

Goldman has leaned hard on investment banking in recent years, though there are signs that it also may be slowing. A record deal boom in 2015 and 2016 is cooling, and some companies have been postponing deals as they wait to see if the Trump administration can achieve promised tax and regulatory changes.

Goldman's investment-management division reported a 13% rise in revenue and net inflows of $25 billion, though nearly all of that came from the acquisition of a business that courts big pension funds.

Goldman's return on equity, a key measure of profitability, stood at 8.7% in the quarter. Goldman is one of few banks that has reliably exceeded 10% -- a level typically demanded by investors -- since the crisis. But in recent quarters, Goldman's ROE has slipped. During the second quarter, it stalled in the same place it was year ago.

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

(END) Dow Jones Newswires

July 18, 2017 15:18 ET (19:18 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.