Goldman Sachs Profit Beats Estimates as Expenses Drop
Goldman Sachs CEO Lloyd Blankfein
Ron Sachs/Pool via Bloomberg
Goldman Sachs CEO Lloyd Blankfein, seen here, is navigating through a business slowdown and trying to burnish Goldman Sachs’s reputation after settling a fraud lawsuit from the Securities and Exchange Commission in July.
Goldman Sachs CEO Lloyd Blankfein, seen here, is navigating through a business slowdown and trying to burnish Goldman Sachs’s reputation after settling a fraud lawsuit from the Securities and Exchange Commission in July. Photographer: Ron Sachs/Pool via Bloomberg
Oct. 19 (Bloomberg) -- Paul Miller, an analyst at FBR Capital Markets, discusses Bank of America Corp.'s $7.3 billion third-quarter loss reported today and the potential impact of foreclosures on the company. Miller speaks from Arlington, Virginia, with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Oct. 19 (Bloomberg) -- Jason Tyler, senior vice president of Ariel Investments LLC, talks about the possible advantage Goldman Sachs Group Inc. may have over competitors and the earnings outlook for U.S. banks. Tyler speaks with Deirdre Bolton and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Goldman Sachs Group Inc., the biggest securities firm by revenue, said profit dropped 40 percent, beating analysts’ estimates, as lower costs and higher investment-banking revenue cushioned a decline in trading.
Third-quarter net income fell to $1.9 billion, or $2.98 a share, from $3.19 billion, or $5.25, a year earlier, the New York-based bank said today in a statement. The average estimate of 20 analysts surveyed by Bloomberg was $2.29 a share, with predictions ranging from $1.81 to $3.09.
Revenue from trading fixed-income, currencies and commodities surpassed results at JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., even after declining 14 percent from the second quarter. Chief Executive Officer Lloyd Blankfein, 56, who led the firm to record earnings last year, is navigating through a business slowdown and trying to burnish Goldman Sachs’s reputation after settling a fraud lawsuit from the Securities and Exchange Commission in July.
“Goldman’s lining itself up for what should be a good performance in a recovering environment,” said Brad Hintz at Sanford C. Bernstein & Co., who was named the top analyst covering brokerage firms in a survey of fund managers by Institutional Investor magazine this year. “We’re probably at the low point for Goldman.”
Share Performance
Goldman Sachs rose $3.05, or 2 percent, $156.75 in composite trading on the New York Stock Exchange at 10:26 a.m., the fourth-best performance on the 81-company Standard & Poor’s 500 Financials Index.
Revenue from trading fixed-income, currencies and commodities, Goldman Sachs’s biggest source of revenue, fell 37 percent from a year earlier to $3.77 billion. The business, known as FICC, beat Hintz’s $3.3 billion estimate.
Equities-trading revenue of $1.86 billion climbed 53 percent from the previous quarter, which included losses on derivatives. The figure exceeded Hintz’s $1.33 billion estimate.
“The Street underestimated fixed income, but fixed income wasn’t great,” Hintz said. “The story for the quarter was that equity rebounded from a very dismal Q2, the bad derivatives quarter.”
The Dodd-Frank financial-regulation legislation signed into law by President Barack Obama in July limits banks’ ability to trade their own capital, known as proprietary trading, and requires portions of the derivatives market to be handled on exchanges. One of Goldman Sachs’s proprietary-trading units, known as principal strategies, is being shut down, people familiar with the situation said last month.
Business Shift
Today’s results demonstrate a shift in how Goldman Sachs makes money as the firm derived 69 percent of revenue from fixed-income and equities trading in the first nine months of the year compared with 77 percent a year earlier.
Revenue from investment banking, which includes fees for advice on takeovers as well as underwriting stock and bond offerings, surged to $1.12 billion in the quarter, up 22 percent from the previous quarter and 24 percent from a year earlier.
Goldman Sachs is the No. 1 ranked adviser on mergers and acquisitions this year, according to data compiled by Bloomberg. The firm’s advisory revenue increased to $496 million in the quarter from $472 million in the prior quarter and $325 million in the year-earlier period.
Revenue from debt underwriting rose to $335 million from $223 million in the prior quarter, while equity underwriting revenue gained to $288 million from $222 million in the second quarter.
Compensation, Benefits
Goldman Sachs also slashed the money set aside for compensation and benefits 28 percent from a year earlier to $3.83 billion, in line with the 28 percent drop in third-quarter revenue. The reduction helped cut total operating expenses 20 percent to $6.09 billion as the firm grappled with higher costs for office space and professional fees, which include legal, accounting and consulting expenses.
Costs also included $27 million of net provisions for litigation and regulatory proceedings.
The firm, which set a Wall Street pay record in 2007, allocated $13.1 billion for compensation in the first nine months of the year, or enough to pay each of its 35,400 employees $370,706 for the period. The figure fell 21 percent from the $16.7 billion set aside for compensation in the first nine months of 2009, which amounted to $527,192 per employee at the time.
Principal Investments
Principal investments, the Goldman Sachs unit that uses the firm’s own money to take stakes in companies and real estate, recorded $754 million in gains compared with $943 million in the prior quarter and $1.26 billion a year earlier. At the end of the quarter Goldman Sachs sold a stake in Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, for HK$17.45 billion ($2.25 billion).
Asset-management revenue climbed 5 percent to $1.02 billion from $976 million in the prior quarter as assets under management rose to $823 billion from $802 billion three months earlier. A jump in the market value of the assets under management accounted for the rise, overcoming $13 billion that clients pulled during the quarter from Goldman Sachs funds.
Revenue from securities services, which includes prime- brokerage services for hedge funds, declined to $383 million from $397 million in the prior quarter.
The company’s statement didn’t give any update on the firm’s Litton Loan Servicing LP unit, which said on Oct. 8 that it suspended some foreclosures as it completes a review of procedures.
Foreclosure Freeze
Several banks froze foreclosures and all 50 states’ attorneys general began a joint investigation last week into how banks handle foreclosures amid evidence that some used faulty paperwork to try to seize homes. The news sparked concern that banks may be required to buy back more home loans from investors in mortgage-backed securities, adding to costs.
The Litton business, which Goldman Sachs acquired in 2008, isn’t likely to be as much of a concern for Goldman Sachs as the mortgage issue is for bigger home lenders such as Bank of America and Wells Fargo & Co., said Matt McCormick, a banking- industry analyst and portfolio manager at Cincinnati-based Bahl & Gaynor, which manages $2.9 billion and doesn’t own Goldman Sachs.
“The issue du jour seems to be the mortgage foreclosure mess,” McCormick said. “The impact on them isn’t as much as Bank of America or Wells Fargo.”
Bank of America, the biggest U.S. bank by assets, reported a $7.3 billion loss earlier today that the company said was caused by new federal rules limiting fees on consumer accounts and credit cards. The Charlotte, North Carolina-based company said yesterday it would resume foreclosures after an Oct. 8 halt to review its procedures.
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net
To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.
Rate These Stories
Rate this Page