Goldman Sachs Reports Surprise Profit Increase -- 2nd Update
July 18 2017 - 9:04AM
Dow Jones News
By Liz Hoffman
Goldman Sachs Group Inc., the storied Wall Street trading firm,
didn't have a good quarter. But Goldman Sachs, the investor, had a
great one.
The firm reported a surprise increase in second-quarter profit
as big gains on its private portfolio of equity stakes offset steep
declines in its core trading businesses.
Goldman reported earnings of $3.95 a share, beating analyst
estimates of $3.39 and last year's second-quarter figure of $3.72.
Revenue of $7.89 billion fell from $7.93 billion, but beat
expectations of $7.52 billion.
Goldman reported a 17% decrease in trading revenues, the
steepest of any big bank to report second-quarter earnings yet.
Trading revenue fell 14% at J.P. Morgan, 9% at Bank of America and
7% at Citigroup.
Shares of Goldman declined 1.1% to $226.65 in premarket trading
Tuesday. The stock has lost 4% this year after surging more than
30% following the election.
Saving the quarter was Goldman's portfolio of private company
stakes. The bank reported a 42% increase in revenue from a category
it calls "Investing and Lending," which isn't a distinct operating
unit but rather encompasses loans and equity investments from
various corners of the bank.
The bank said the increase was mainly due to higher valuations
for its stakes in private companies. The portfolio includes
technology startups such as trading firm Kensho Technologies
Inc.
For all Goldman's changes since the financial crisis, the firm
run by Chief Executive Lloyd Blankfein is still heavily dependent
on arranging big, complex trades and deals for corporate and
institutional clients. Demand for those services has flagged as
placid markets have churned higher and companies have delayed some
deals, awaiting signs from Washington on tax and regulatory
reform.
Banks rely on idiosyncratic events like the U.K.'s Brexit vote
or the U.S. presidential election to spur trading. There have been
fewer of those kind of events so far this year.
Revenue from trading bonds and other fixed-income products fell
40%. That business stumbled badly in the first quarter and has
generally struggled to find its footing as volatility remains low
and credit spreads -- the gap between bids and offers where banks
make their money -- have narrowed.
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.
The results will likely amplify criticism that Goldman hasn't
responded quickly enough to changing investors 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 rival and historically a weakling in debt
trading.
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.
"Fixed-income trading took a massive blow at Goldman Sachs, far
worse than we have seen at other banks," said Octavio Marenzi,
chief executive of capital markets management consultancy
Opimas.
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. Surprisingly, revenue rose in cash equities, the plain-vanilla
business of buying and selling stocks, bucking a yearslong decline
as electronification has gutted fees and quiet markets have reduced
trading.
Goldman was once the stock-trading king of Wall Street -- it
virtually invented the large institutional "block trade" in the
1960s -- but lost the crown to Morgan Stanley in 2014 and has
fallen further behind since.
Executives have said the firm has invested in technology that
will take time to bear fruit, like the 2015 purchase of a Swedish
firm that specializes in ultrafast exchange hookups.
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 remains the No. 1 adviser this year and snagged roles on
the two largest deals of the second quarter, Amazon.com Inc.'s deal
for Whole Foods Market and Becton Dickinson & Co.'s takeover of
C.R. Bard Inc.
Goldman's return on equity, a key measure of how profitably it
invests shareholders' money, 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.
Goldman's investment-management division, which serves big funds
and wealthy individuals, reported a 13% increase in revenue as well
as net inflows of $25 billion. Goldman has largely placed its chips
on active stock picking, an increasingly tough business as
investors have shifted trillions of dollars to strategies that
simply mirror the market.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
July 18, 2017 08:49 ET (12:49 GMT)
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