Goldman Misses Estimates on Bigger Trading Drop Than Rivals

Inside Goldman's Disappointing Earnings Report
  • Fixed-income trading revenue falls 34 percent amid volatility
  • Revenue drops below $7 billion for first time in two years

Goldman Sachs Group Inc. reported profit that missed analysts’ estimates for the first time in four years as global market turmoil took a bigger toll on its trading revenue than at rivals.

Third-quarter net income fell 36 percent to $1.43 billion, or $2.90 a share, from $2.24 billion, or $4.57, a year earlier, the New York-based company said Thursday in a statement. Earnings adjusted for an accounting gain were $2.64 a share, short of the $3 average estimate of 22 analysts in a Bloomberg survey. Net revenue was $6.86 billion, falling below $7 billion for the first time in two years.

Chief Executive Officer Lloyd C. Blankfein has resisted pressure for large-scale cuts, maintaining that activity from trading clients will bounce back. His firm’s 34 percent decrease in fixed-incometrading revenue was larger than declines of 23 percent at JPMorgan Chase & Co. and 11 percent at Bank of America Corp., excluding accounting gains.

“I’m not alarmed by the number, but it was a tougher quarter for them than some of their peers,” Devin Ryan, an analyst at JMP Group Inc. in New York, said in an interview.

Goldman Sachs slid 1.5 percent to $176.81 at 9:33 a.m. in New York. The shares had dropped 7.4 percent this year through Wednesday.

Blackstone’s Loss

A volatile quarter in which the Standard & Poor’s 500 Index dropped 6.9 percent weighed on Goldman Sachs, the biggest private-equity investor among banks, and Blackstone Group LP, the world’s largest alternative-asset manager. Goldman Sachs’s equity-investments revenue plunged 65 percent, while Blackstone on Thursday posted its first loss since 2011.

“Any quarter where you have extreme market volatility like you did in the third quarter, you’re going to have some mark-to-market issues,” Ryan said.

The bank set aside $416 million for litigation and regulatory proceedings, more than twice as much as a year earlier. That brings total legal costs this year to more than $2 billion. Goldman Sachs has held talks with the U.S. Justice Department over a $2 billion to $3 billion settlement of a probe into its sales of mortgage bonds leading up to the financial crisis, a person with direct knowledge of the situation said in June. The company added $1.45 billion to reserves for litigation and regulatory proceedings in the second quarter and increased its estimate of possible losses beyond those reserves by 55 percent to $5.9 billion.

ROE Drops

The firm’s return on equity, a measure of profitability that takes into account how much capital the business uses, was 7 percent in the third quarter, compared with 11.8 percent a year earlier.

Revenue from trading fixed-income, currencies and commodities was $1.31 billion. That fell short of estimates of $1.4 billion from Macquarie Group Ltd.’s David Konrad and $1.48 billion from Steven Chubak at Nomura Holdings Inc.

“We experienced lower levels of activity and declining asset prices during the quarter, reflecting renewed concerns about global economic growth,” Blankfein said in the statement.

Revenue from the equities division increased 18 percent from a year earlier to $1.72 billion, excluding accounting gains. That compared with Konrad’s $1.36 billion estimate and a projection of $1.9 billion from Chubak.

Trading Results

Total revenue from sales and trading, led by Pablo J. Salame, Isabelle Ealet and Ashok Varadhan, was $3.03 billion. That compared with $4.34 billion at JPMorgan and $3.16 billion at Bank of America.

Compensation, the bank’s biggest expense, fell to $2.35 billion, or 34 percent of revenue. That was down from 42 percent in the first half, and up from 33 percent a year earlier. Goldman Sachs in recent years has cut the ratio in the third and fourth quarters to boost profitability.

Investing and lending, which as of June included more than $20 billion of the bank’s own equity investments and more than $60 billion of loans and other debt, generated $670 million of revenue, down from $1.69 billion a year earlier.

Wild Card

Analysts had pegged that business as the quarter’s biggest wild card as market declines threatened writedowns on the firm’s investments. Revenue estimates ranged from $1.2 billion from Brian Kleinhanzl at Keefe Bruyette & Woods to $50 million from Credit Suisse Group AG’s Christian Bolu.

Goldman Sachs bought back $1.05 billion of stock in the quarter, up from $245 million in the second period. The firm had to resubmit its capital plan to win Federal Reserve approval in the annual stress test in March, and Chief Financial Officer Harvey Schwartz said in April that buybacks over the next five quarters would be weighted toward later periods.

Blankfein, 61, announced in September that he has a “highly curable” form of lymphoma and will undergo chemotherapy over the next several months. He typically doesn’t speak on the firm’s earnings conference call.

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