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 (April 18, 2018).

Goldman Sachs Group Inc. reported sharply higher profit, looking more like the balanced business Chief Executive Lloyd Blankfein has been working to build in the wake of the financial crisis.

The Wall Street firm's profit rose 26% from a year ago, one of the strongest showings among the five big U.S. banks to have reported quarterly earnings so far. Morgan Stanley reports Wednesday.

Shares fell, however, after Goldman said it wouldn't buy back stock in the second quarter.

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.

Overall, 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 closed down 1.7% 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 revenue 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 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 Jones Industrial Average swinging wildly 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 increased from year-end.

Goldman is hiring rainmakers and chasing after deals it once deemed small-time in an effort to expand 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 Inc. and music-streaming service Spotify Technology SA.

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 this revenue because it can swing 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 concerns 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 18, 2018 02:47 ET (06:47 GMT)

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