Goldman Beats Estimates on Investments, Underwriting Fees

Goldman Profit Beats Estimates on Debt Trading, Investments
A pedestrian passes in front of 200 West Street, which houses the headquarters of Goldman Sachs Group Inc., in New York. Photographer: Scott Eells/Bloomberg

Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets, reported profit that beat analysts’ estimates on higher underwriting fees and a jump in the value of the firm’s own investments.

Third-quarter net income of $1.51 billion, or $2.85 per share, compared with a loss of $393 million, or 84 cents, a year earlier, the New York-based bank said today in a statement. The average estimate of 25 analysts surveyed by Bloomberg was $2.28 a share.

Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, 58, benefited from a rise in asset values that boosted the firm’s holdings of stock and debt, reversing a loss from a year earlier. Revenue from trading fixed-income, currency and commodities fell short of gains posted by JPMorgan Chase & Co. and Citigroup Inc.

“The main driver of the earnings beat was basically larger mark-to-market type gains in their investing and lending division,” said Richard Staite, an analyst at Atlantic Equities LLP in London who rates Goldman Sachs stock “neutral.” Trading revenue matched estimates, and “given that JPMorgan and Citigroup performed better than expected, that could be a bit disappointing,” Staite said.

Goldman Sachs raised the quarterly dividend to 50 cents from 46 cents, the second increase this year. The shares, which climbed 3.6 percent yesterday, dropped 1 percent to $123.22 in New York trading at 4:15 p.m. Even after gaining 38 percent this year, the stock is below the firm’s theoretical liquidation value as investors wait to see whether returns will remain depressed by slow economic growth and regulatory constraints.

‘Generally Solid’

“This quarter’s performance was generally solid in the context of a still challenging economic environment,” Blankfein said in the statement. “We continue to be disciplined in managing our operations and capital.”

Investing & Lending, the Goldman Sachs segment that includes the firm’s own holdings in stock, debt, private equity and funds, generated $1.8 billion of third-quarter revenue, compared with negative $2.48 billion a year earlier. The average estimate of six analysts surveyed by Bloomberg was for $1.19 billion.

The figure included a $99 million gain from the firm’s investment in Industrial & Commercial Bank of China Ltd., $824 million from other equities, $558 million from debt securities and loans, and $323 million of “other” revenue, mostly from Goldman Sachs’s stakes in funds.

Sales, Trading

Revenue from sales and trading, overseen globally by Isabelle Ealet, Pablo J. Salame and Harvey M. Schwartz, rose 3 percent to $4.18 billion in the quarter and was up 8 percent from the prior quarter. Schwartz, 48, will succeed Chief Financial Officer David A. Viniar, 57, at the end of January, the firm said on Sept. 18. Viniar, who has worked at Goldman Sachs for 32 years and served as CFO since 1999, will join the board of directors.

Fixed-income, currency and commodity trading, or FICC, revenue climbed 28 percent from a year earlier to $2.22 billion and was up 1 percent from the second quarter. Goldman Sachs’s figure included a $225 million loss related to accounting adjustments. JPMorgan’s fixed-income trading revenue excluding accounting adjustments rose 33 percent in the third quarter to $3.72 billion and Citigroup’s increased 63 percent to $3.7 billion.

Stock Trading

Goldman Sachs’s equities trading revenue fell 16 percent to $1.96 billion from a year earlier and was 16 percent higher than the prior quarter. The figure included $145 million in accounting adjustments. JPMorgan’s equity-trading revenue excluding accounting adjustments was virtually unchanged at $1.04 billion, while Citigroup’s rose 76 percent to $510 million.

Goldman Sachs’s value-at-risk, a measure of the firm’s potential daily trading losses, fell to $81 million in the third quarter, the lowest since the fourth quarter of 2005.

Return on equity, a measure of how well the firm reinvests stockholder funds, was 8.6 percent for the third quarter, up from 5.4 percent in the second quarter. Tangible book value per share, a gauge of how much each stockholder would get if the firm were liquidated, climbed to $129.69 from $126.12 at the end of June.

Third-quarter revenue more than doubled from a year earlier to $8.35 billion and was up 26 percent from the second quarter. Revenue exceeded the $7.18 billion average estimate of 16 analysts surveyed by Bloomberg.

Expenses Rise

Expenses rose 40 percent from a year earlier to $6.05 billion and were up 16 percent from the prior quarter. After Goldman Sachs reported its worst first-half revenue in seven years, the company in July started cutting $500 million of costs on top of an earlier $1.4 billion reduction.

Compensation, the firm’s biggest expense, more than doubled from a year earlier to $3.68 billion and the bank added 300 jobs in the quarter. Compensation in the first nine months of the year rose 10 percent to $11 billion, enough to pay each of the firm’s 32,600 employees an average of $336,442 for the period.

In the third quarter, Wall Street’s biggest banks benefited from higher prices on stocks and bonds as central-bank efforts to spur economic growth fueled investor demand for riskier assets. The average yield premium that investors demand to hold corporate debt over government bonds dropped during the quarter to 168 basis points, or 1.68 percentage points, from 215 basis points, according to an index compiled by Bank of America Corp.’s Merrill Lynch.

Investment Banking

Investment banking, led worldwide by Richard J. Gnodde, David M. Solomon and John S. Weinberg, made $1.16 billion of revenue, 49 percent higher than a year earlier and 3 percent less than the prior quarter. JPMorgan’s investment-banking revenue was $1.43 billion in the quarter and Citigroup’s was $926 million.

Fees from financial advice, which includes mergers and acquisitions, fell 3 percent to $509 million and were up 9 percent from the second quarter. Goldman Sachs’s mergers-and-acquisitions team, led by Gene T. Sykes, is ranked first among advisers on global takeovers announced this year, the same position it held last year, according to data compiled by Bloomberg.

Revenue from debt underwriting almost tripled to $466 million and was down 6 percent from the prior quarter. Goldman Sachs is seventh among underwriters of corporate debt this year, the same position it held at this stage last year, according to data compiled by Bloomberg.

Stock Underwriting

Equity underwriting revenue more than doubled to $189 million and fell 21 percent from the previous quarter. The firm’s equity capital markets team, led by Stephen Pierce, is fourth among managers of equity, equity-linked and rights offerings this year, down from first place at this time last year, according to data compiled by Bloomberg.

Fund management, overseen globally by Eric S. Lane and Timothy J. O’Neill, made $1.2 billion in the quarter, down 2 percent from a year earlier and 10 percent lower than the prior quarter. Assets under management rose 2 percent during the quarter to $856 billion.

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