Goldman Sachs Net Falls as Debt Trading Lags Behind JPMorgan

Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank by assets, said profit fell 23 percent as revenue from trading bonds, currencies and commodities lagged behind Citigroup Inc. and JPMorgan Chase & Co.

First-quarter net income dropped to $2.11 billion from $2.74 billion a year earlier, the New York-based bank said today in a statement. Earnings per share of $3.92 beat the $3.55 average estimate of 24 analysts surveyed by Bloomberg. The bank boosted its quarterly dividend 31 percent to 46 cents a share, the first increase since 2006.

Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, reported a 20 percent decline in fixed-income trading revenue to $3.46 billion and cut the size of its market bets to the lowest level since 2006. JPMorgan’s revenue from that business fell 11 percent to $4.66 billion and Citigroup, No. 3 by assets, reported a 4 percent drop in fixed-income trading to $3.65 billion.

“Although earnings actually beat consensus, I think that the results look somewhat disappointing in comparison with the strong numbers we’ve seen out of JPMorgan and Citigroup,” Richard Staite, an analyst at Atlantic Equities LLC in London, said in a telephone interview. “The market had perhaps hoped for a real blow-out quarter from Goldman Sachs.”

Goldman Sachs fell 87 cents, or 0.7 percent, to $116.86 at 4:15 p.m. in New York trading. The stock has gained 29 percent this year. It declined 46 percent in 2011, the second-worst annual performance since Goldman Sachs went public in 1999, as profit slid to the lowest level since 2008.

Cost Cutting

Blankfein, 57, who began cutting costs in 2011 as revenue declined for the second straight year, is banking on international expansion and a market rebound to restore profit growth. Gains in stock and corporate debt markets boosted total trading revenue 87 percent from the fourth quarter.

“We’re encouraged by the early signs of improvement” in markets, although the firm remains “cautious,” Chief Financial Officer David A. Viniar, 56, said during a conference call with analysts and investors today. He added that the dividend increase was made in response to “shareholder feedback.”

Net income attributable to common shareholders, which includes the cost of preferred dividends, climbed to $2.07 billion from $908 million, or $1.56 per fully diluted share, a year earlier. Excluding a $1.64 billion one-time dividend paid to Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), last year’s first quarter net income for common shareholders was $2.55 billion, or $4.38 per share.

Revenue Decline

Revenue at Goldman Sachs fell 16 percent to $9.95 billion from $11.9 billion a year earlier, beating the $9.41 billion average estimate of 15 analysts surveyed by Bloomberg. Book value per share rose to $134.48 from $130.31 at the end of December.

“Our mix of businesses gives the firm significant room for revenue growth as economic and market conditions continue to improve,” Blankfein said in the statement.

Value-at-risk, a measure of how much the firm expects it could lose in a single day of trading, dropped to an average of $95 million in the first quarter from $135 million in the fourth quarter. A 27 percent drop in value-at-risk on interest rates compared with the prior quarter was driven by “lower levels of volatility,” Viniar told analysts on the call.

Return on Equity

Return on equity, a gauge of how well Goldman Sachs reinvests shareholders’ earnings, was 12.2 percent. That compares with 14.5 percent in the first quarter of 2011, excluding the dividend to Berkshire. The return on equity is “not something we consider acceptable,” Viniar said.

Operating expenses decreased to $6.77 billion from $7.85 billion a year earlier. Compensation, the biggest expense, declined 16 percent to $4.38 billion. The firm employed 32,400 people at the end of March, down from 35,400 a year earlier.

Last year’s plan to reduce expenses by $1.4 billion has been “largely implemented,” and the company will continue to seek ways to cut costs, Viniar said today.

Institutional securities, the sales and trading division led since January by Isabelle Ealet, Pablo J. Salame, and Harvey M. Schwartz, generated $5.17 billion in revenue during the first quarter, or 57 percent of the total. That’s down 14 percent from $6.65 billion a year earlier and up from $3.06 billion in the fourth quarter.

Accounting Adjustments

The figures include a $225 million net loss from accounting adjustments related to an improvement in the creditworthiness of the firm’s own debt, Goldman Sachs said. Viniar said that loss was split about evenly between fixed-income, currency and commodities trading, or FICC, and equities trading.

FICC trading revenue of $3.46 billion compared with $4.33 billion a year earlier and $1.36 billion in the fourth quarter. Interest-rate trading, which includes government bonds and related derivatives, “had a very strong quarter and all the other businesses had good, but not great, quarters,” Viniar said. Interest-rate trading is run globally by London-based Konstantinos N. “Kostas” Pantazopoulos, a 43-year-old Greek citizen who has been a partner since 2006.

Viniar, asked why FICC trading fell short compared with Citigroup and JPMorgan, the biggest U.S. bank by assets, said the firm and its clients “have been cautious.” He also said Goldman Sachs’s share of the fixed-income market has fallen since 2009, when it generated record trading revenue.

Market Share

“We still believe we’re getting a very high market share,” he said. “We’re not getting the market share we were getting in 2009, and remember I told you in 2009 we weren’t going to keep that market share.”

Equities revenue of $2.25 billion was down from $2.32 billion a year earlier and up from $1.69 billion in the prior quarter. Paul M. Russo, Michael D. Daffey and R. Martin Chavez were named last month as co-chief operating officers of the equities division, reporting to Ealet, Salame and Schwartz.

Investing and lending, the segment that includes money made or lost on Goldman Sachs’s investments in companies, securities and real estate, generated $1.91 billion of gains in the quarter. That compares with $2.71 billion a year earlier and $872 million in the fourth quarter.

Within that segment was $169 million from the company’s stake in Industrial & Commercial Bank of China Ltd., the nation’s largest lender. That holding made $316 million a year earlier and $388 million in the fourth quarter.

Investment Banking

The investment-banking division, led since May by Richard J. Gnodde, David M. Solomon and John S. Weinberg, made $1.15 billion of revenue in the quarter, down from $1.27 billion a year earlier and compared with $857 million in the fourth quarter. That beat estimates from five analysts surveyed by Bloomberg that ranged from $786 million to $993 million.

“Investment-banking revenues of $1.2 billion were much better than our forecast,” analysts at Credit Suisse Group AG led by Howard Chen wrote in a note to investors today. “The current backdrop boasts many of the ingredients that could drive a surge in activity.”

Within that business, fees from takeovers and other financial-advisory assignments rose 37 percent to $489 million from $357 million a year earlier and compared with $470 million in the fourth quarter. Last week the company said that Yoel Zaoui, who had been the London-based co-head of global mergers and acquisitions with Gene T. Sykes for less than a year, is leaving after a 24-year career at the bank.

Equity Underwriting

Equity underwriting revenue decreased 40 percent to $255 million from $426 million a year earlier and was up from $191 million in the fourth quarter. Debt underwriting fees fell 16 percent to $410 million from $486 million a year earlier and were higher than the $196 million generated in the fourth quarter.

“While debt financing markets are open and equity financing markets are improving, M&A activity has not yet gained momentum,” Viniar told analysts today. He said the firm’s backlog of investment-banking assignments remained unchanged in the first quarter from the end of 2011.

Goldman Sachs ranks fourth among advisers on takeovers announced globally this year after winning the top spot for 2011, according to data compiled by Bloomberg. The bank has slipped to third place in equity, equity-linked and rights offerings globally, after securing the No. 1 spot last year, data compiled by Bloomberg show. In global corporate bond underwriting, Goldman Sachs ranks seventh this year.

Investment Management

Revenue from investment management, the division led since the start of this year by Eric S. Lane and Timothy O’Neill, dropped 8 percent to $1.18 billion from $1.27 billion a year earlier and compared with $1.26 billion in the fourth quarter. Assets under management fell to $824 billion from $828 billion at the end of 2011.

“Our performance in the last several months has definitely improved and if that continues I think that would be a good precursor to good inflows of assets,” Viniar said. “We’ll have to see if that continues.”

Blankfein and President Gary D. Cohn, 51, were criticized by former derivatives salesman Greg Smith in a New York Times opinion piece last month for presiding over what Smith called a decline in the firm’s commitment to client service. In a memo sent to current and former employees, Blankfein and Cohn said Smith’s view of the firm isn’t shared by most employees, adding that they would investigate his claims.

Commitment to Clients

“Everyone at Goldman Sachs remains steadfast in their commitment to serving our client franchise,” Viniar said today. “We’re keenly aware that the quality of our advice and execution in today’s challenging markets serves as the foundation for maintaining these long-term client relationships.”

Blankfein and Cohn, approaching their sixth anniversary in their current roles, are also contending with the departure of more than 50 partners in the past year, including eight members of the management committee. Viniar said the departures are “natural” and “warranted” because the firm had lower-than- normal departures in the years immediately after the financial crisis.

“I would expect that between now and the end of the year you’ll see more partners leaving,” Viniar said. “It’s just the natural progression and our bench is so deep that it’s really not an issue at all.”

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

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