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Goldman Sachs Net Misses Estimates on Fixed-Income Tumble

Goldman Sachs Group Inc. Chairman and CEO Lloyd C. Blankfein
Goldman Sachs Group Inc. Chairman and Chief Executive Officer Lloyd C. Blankfein. Photographer: Andrew Harrer/Bloomberg

Goldman Sachs Group Inc., the U.S. bank that makes most of its money from trading, reported second-quarter profit that fell short of analysts’ estimates as fixed-income revenue plunged 63 percent from the first quarter.

Net income climbed 77 percent to $1.09 billion, or $1.85 per share, from $613 million, or 78 cents, in the same period a year earlier, the New York-based company said today in a statement. That compares with the $2.30 per-share average estimate of 23 analysts surveyed by Bloomberg. Earnings fell 38 percent if one-time costs are excluded from the 2010 results.

The fixed-income trading-revenue drop was more than twice as large as at any other major U.S. bank. Overall trading revenue at Goldman Sachs, led by Chairman and Chief Executive Officer Lloyd C. Blankfein, fell 47 percent from the first quarter. JPMorgan Chase & Co.’s investment bank reported a smaller-than-expected 17 percent decline in trading revenue last week, while the same business at Citigroup Inc. fell 21 percent.

“All the news is going to be about Goldman Sachs today because people brought their numbers down and they still missed those numbers,” Paul Miller, an analyst at FBR Capital Markets, said in an interview on Bloomberg television. “The question is going to be why were their revenues down much greater than their competitors? Probably they were positioned differently.”

Analysts in the Bloomberg survey reduced their earnings estimates by an average of $1.09 per share in the past four weeks.

Shares Drop

Goldman Sachs fell $3.33, or 2.6 percent, to $126 in New York Stock Exchange composite trading at 9:31 a.m., the biggest drop in the 81-company Standard & Poor’s 500 Financials Index.

Last year’s second-quarter earnings were reduced by a $550 million settlement with the Securities and Exchange Commission and a $600 million expense to pay a U.K. tax on employee bonuses. Excluding those costs, earnings would have been $1.76 billion, or $2.75 per share, in last year’s second quarter.

“Certain of our businesses had disappointing results as we reduced our market risk in response to attempting to manage fluctuations in prices and market liquidity,” Blankfein, 56, said in the statement.

Value at Risk

Value at risk, a gauge of how much the firm could lose in a single day of trading, fell for the eighth consecutive quarter, to $101 million. The figure was the lowest since the third quarter of 2006. The firm reduced the amount at risk to equity prices, currencies and interest rates, while the risk in commodity prices jumped.

Revenue fell 39 percent to $7.28 billion from $11.9 billion in the first quarter and $8.84 billion a year earlier. The figure fell short of the average $8.2 billion estimate of 15 analysts surveyed by Bloomberg. Return on equity, a measure of how well the firm reinvests shareholder funds, decreased to 6.1 percent from 12.2 percent in the first quarter.

Revenue from trading, run since February 2008 by Edward K. Eisler, David B. Heller, Pablo J. Salame and Harvey M. Schwartz, fell to $3.52 billion from $6.65 billion in the first quarter and was down 29 percent from $4.98 billion in the second quarter of 2010.

“They can recover in the next couple of quarters on that trading stuff,” said FBR’s Miller. “Trading is a very volatile, very lumpy line.”

Fixed Income

Fixed-income, currency and commodities trading, typically the largest source of Goldman Sachs’s revenue, dropped to $1.6 billion from $4.33 billion in the first quarter. Last week JPMorgan, the second-biggest U.S. bank, said fixed-income trading revenue fell 18 percent from the first quarter to $4.28 billion. Citigroup, the third-biggest U.S. bank by assets, said fixed-income trading revenue dropped 20 percent from the first quarter to $3.03 billion.

Roger Freeman, an analyst at Barclays Capital in New York, had estimated that Goldman Sachs would generate $2.8 billion in revenue from fixed-income, currencies and commodities.

The decline at Goldman Sachs reflected “significantly lower results in mortgages, commodities and interest-rate products,” the firm said in the statement. “In addition, net revenues in currencies decreased slightly and net revenues in credit products were essentially unchanged compared with the second quarter of 2010.”

Equity Trading

Goldman Sachs’s equity-trading revenue declined 17 percent to $1.92 billion from $2.32 billion in the prior quarter and rose 19 percent from $1.61 billion a year earlier. That compared with $1.22 billion of second-quarter equity-trading revenue at JPMorgan and $812 million at Citigroup. Freeman expected Goldman Sachs’s equities revenue to be $2 billion.

Revenue from investment banking, overseen globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, advanced to $1.45 billion in the quarter from $1.27 billion in the first quarter and $941 million in the second quarter of 2010. By comparison, JPMorgan’s investment-banking fees totaled $1.92 billion in the quarter and Citigroup reaped $1.09 billion.

Goldman Sachs’s investment-banking revenue exceeded estimates from analysts at Atlantic Equities, Barclays Capital and ISI Group, who expected revenue in the range of $1.2 billion to $1.3 billion.

Goldman Sachs’s fees from takeover advice, a business led globally by Gene T. Sykes and Yoel Zaoui, increased to $637 million from $357 million in the first quarter and from $471 million a year earlier. The firm ranks first among advisers on mergers and acquisitions announced so far this year, according to Bloomberg data.

Stock Underwriting

The firm also ranks first year-to-date in managing global equity sales and initial public offerings, the data show. Revenue from equity underwriting, overseen by London-based Matthew Westerman, fell to $378 million from $426 million in the first quarter, while debt underwriting revenue dropped to $433 million from $486 million in the prior three months.

Investing and lending, the segment in which Goldman Sachs books gains or losses from the firm’s own stakes in companies such as Industrial & Commercial Bank of China Ltd. and other assets, made $1.04 billion in the period, compared with $2.71 billion of gains in the first quarter and $1.79 billion in the second quarter of 2010.

Revenue from investing and lending was more than double what was expected by analysts at Atlantic Equities, Barclays Capital and ISI Group. Their estimates ranged from $210 million to $411 million.

Revenue from investment management, the business run by Edward C. Forst and Timothy O’Neill, was unchanged from the first quarter at $1.27 billion and up from $1.13 billion in the second quarter of last year. Assets under management increased to $844 billion at the end of June from $840 billion at the end of March.

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