Goldman Bond-Trading Boosts Profit; Cost Cuts Fall Short

Goldman Sachs Profit Jumps 74% on Bond Trading
  • Fixed-income revenue rises 33%, equities revenue drops 11%
  • Firm’s compensation costs decline 13% to $3.3 billion

Goldman Sachs Group Inc., the Wall Street bank most reliant on trading, posted a 74 percent increase in second-quarter profit as revenue from fixed-income trading and debt underwriting surpassed analysts’ estimates. Expenses declined less than some projections.

Net income rose to $1.82 billion, or $3.72 a share, from $1.05 billion, or $1.98, a year earlier, when the company had a $1.45 billion provision for legal and other regulatory matters, New York-based Goldman Sachs said Tuesday in a statement. That beat the $3.05 average estimate of 18 analysts surveyed by Bloomberg.

Chief Executive Officer Lloyd Blankfein, 61, is investing in technology and carrying out the biggest expense cuts in years to weather an industrywide revenue slump. More than 400 employees have been dropped this year in New York, including traders and salespeople in the securities unit, and total staff fell by 2,000. He’s been helped by a rebound in fixed-income trading, which surged 33 percent in the second quarter. While that topped analysts’ estimates, it was by a smaller margin than at Goldman Sachs’s biggest competitors.

“It was a respectable trading quarter, but I suspect the bar was raised over the past week with what we saw out of the other fixed-income sales and trading platforms,” said Devin Ryan, an analyst at JMP Securities. “Maybe there was an expectation of even stronger results.”

Shares Decline

Goldman Sachs, which gained almost 11 percent in the past month through Monday, fell 1.4 percent to $160.97 at 11:52 a.m. in New York, the worst performance in the Dow Jones Industrial Average. The stock has dropped 10 percent this year.

Goldman Sachs left its quarterly dividend unchanged at 65 cents a share, payable on Sept. 29 to shareholders of record on Sept. 1, the bank said in the statement. The company was expected to increase the payout to 70 cents, according to the Bloomberg Dividend Forecast. The firm repurchased $1.74 billion worth of shares during the second quarter.

Net revenue in the quarter dropped 13 percent to $7.93 billion, beating the $7.55 billion estimate. Expenses declined to $5.47 billion, falling short of the $5.34 billion projection by analysts. Provisions for legal matters declined to $126 million and compensation costs slid 13 percent to $3.3 billion.

Fixed Income

Fixed-income trading revenue rose to $1.93 billion, beating the $1.8 billion estimate of six analysts surveyed by Bloomberg. Equities-trading revenue of $1.75 billion, an 11 percent drop, missed the $1.88 billion estimate. The trading figures exclude an accounting adjustment in last year’s second quarter. The sales-and-trading division is overseen by Isabelle Ealet, Pablo Salame and Ashok Varadhan.

Chief Financial Officer Harvey Schwartz said on a conference call with analysts that when client activity picks up, like it did in the days following the U.K.’s vote to leave the European Union, the firm’s share of fixed-income revenue rises.

“After Brexit, when volumes were much higher for those couple of days, in all the things that we watch, we could see a demonstrable uptick in our market shares,” Schwartz said. “That may be the result of the current competitive environment and as we’ve talked about, a number of global competitors are going through restructurings, they’ve been quite challenged. So when volumes pick up we feel like we see it.”

Revenue from investment banking -- run by Richard Gnodde, David Solomon and John Waldron -- fell 11 percent to $1.79 billion, exceeding the $1.56 billion estimate. Debt-underwriting revenue climbed to $724 million, topping the $550 million estimate. The firm’s backlog of pending deals declined compared to the end of the first quarter and last year’s second quarter, Schwartz said.

Investment management, run by Tim O’Neill and Eric Lane, reported an 18 percent drop to $1.35 billion. Revenue in the investing and lending division, which houses the firm’s debt and equity stakes, fell 38 percent to $1.11 billion.

The bank completed the purchase of General Electric Co.’s online bank in the second quarter, adding more than $16 billion in deposits in one of the most-watched strategy shifts at Goldman Sachs, which became a bank holding company after the financial crisis. The firm is also developing a consumer-lending operation as it seeks to do more business with Main Street.

Goldman Sachs is the fifth of the six biggest U.S. banks to report results. JPMorgan Chase & Co. kicked off earnings season last week by beating estimates as fixed-income trading revenue and loan growth jumped. Citigroup Inc. and Bank of America Corp. also exceeded estimates, while Wells Fargo & Co.’s results were in line with expectations. Morgan Stanley is scheduled to report on Wednesday.

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