Goldman Sachs Rises on Comeback Bets
Goldman Sachs Group Inc. (GS) rose 5.5 percent in New York trading as investors looked past a third- quarter loss and focused on gains in trading revenue and prospects for a rebound in underwriting and takeovers.
Revenue from trading stocks and bonds increased 16 percent from the second quarter and the backlog of investment-banking assignments climbed, Goldman Sachs said today. The third-quarter loss, which was driven by markdowns on the value of the firm’s own investments, was $393 million, or 84 cents a share, the New York-based company said in a statement.
Chairman and Chief Executive Officer Lloyd C. Blankfein, 57, has tied Goldman Sachs’s fortunes to trading, which accounted for 62 percent of revenue in the first nine months of 2011. After reporting weaker second-quarter revenue than competitors in that business, Goldman Sachs beat both Bank of America Corp. (BAC) and Citigroup Inc. (C) last quarter, excluding accounting gains related to the decline of the banks’ own debt.
“In the core business there are some encouraging signs,” said William Fitzpatrick, a Milwaukee-based financial-services analyst at Manulife Asset Management, which manages $217 billion and owns Goldman Sachs stock. “It was the private-equity business that weighed on results in the quarter.”
The shares rose $5.35 to $102.25 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest gain in more than two months, as the Standard & Poor’s 500 Financial Index climbed 5 percent.
“Trading wasn’t as bad as we all thought, and the bigger losses came from writedowns in their investing and lending unit,” Thomas Brown, chief executive officer of Second Curve Capital LLC, said in an interview on Bloomberg Television’s “In the Loop.” “I see Goldman as going through a rough patch in the environment, but it’s environment-driven, not Goldman Sachs- driven.”
The third-quarter loss, which compared with a year-earlier profit of $1.9 billion, was the second time that Goldman Sachs failed to post a profit since it became a public company in 1999. In both cases the loss was caused by reductions in the value of Goldman Sachs’s investments in companies, private- equity funds and loans.
The firm, which said in July that it planned to cut about 1,000 jobs to reduce annual costs by $1.2 billion, said it employed 34,200 people at the end of September, down 1,300 from the end of June.
Chief Financial Officer David A. Viniar told analysts on a conference call today that about 500 of the job cuts in the quarter related to the effort to cut costs. The other 800 came from the sale of Litton Loan Servicing LP to Ocwen Financial Corp., which more than offset the addition of personnel when the firm gained control of its Australian joint venture, JBWere Ltd.
Investing and Lending, which includes Goldman Sachs’s stakes in Industrial & Commercial Bank of China (1398) Ltd. and other companies, as well as holdings by the Special Situations Group run by Jason M. Brown, reported negative revenue of $2.48 billion for the quarter. That compared with $1.8 billion in revenue in the same period a year earlier.
About $1.05 billion of last quarter’s negative revenue was attributed to a drop in the value of ICBC, China’s biggest lender, and $1 billion was caused by losses on other equity securities. The unit also booked $907 in negative revenue from “debt securities and loans,” while gaining $477 from investments in other entities.
Brad Hintz, an analyst at Sanford C. Bernstein & Co., had estimated the unit’s loss would be $1.67 billion, and predicted the debt securities and loans segment would post $200 million in revenue.
Most of the writedowns related to spread widening on senior debt and so-called mezzanine debt, although the segment also included some distressed loan losses, Viniar said on the call.
All of the Investing and Lending division’s losses were unrealized, meaning they reflected markdowns in asset values and not actual sales at lower values, Viniar said. He said that division sold some assets at a profit during the period, which helped to offset the writedowns.
“There’s no reason to think it won’t rebound,” Manulife’s Fitzpatrick said of the Investing and Lending results. “I think it will remain a big part of the business.”
Goldman Sachs expects Investing and Lending to produce a return in excess of 10 percent over the long run, Viniar told analysts.
“In any quarter it can be extremely volatile and up or down a lot more than that,” he said. “Our history has been a lot better than a 10 percent return.”
Third-quarter revenue fell 60 percent to $3.59 billion from $8.9 billion a year earlier and declined 51 percent from $7.28 billion in the second quarter. The company’s book value per common share decreased to $131.09 from $131.44 at the end of the second quarter.
Overall revenue from trading, run since February 2008 by Edward K. Eisler, David B. Heller, Pablo J. Salame, and Harvey M. Schwartz, rose 16 percent to $4.06 billion from $3.52 billion in the second quarter and was down 13 percent from $4.67 billion in the third quarter of 2010.
The trading results included about $450 million of so- called debt valuation adjustments, or DVAs, with about $300 million in fixed-income and about $150 million in equities trading, Viniar said. U.S. accounting rules require that banks book losses when the value of their debt rises and gains when it declines on the theory that a loss, or profit, would be realized if the bank were to repurchase the debt.
‘A Little Confused’
Like most of its rivals, spreads on Goldman Sachs’s corporate debt and credit-default swaps widened during the quarter as investors became more cautious about risk from the European sovereign debt crisis. Viniar said the wider spreads make him “a little confused” because the firm believes it has strong capital and liquidity.
“It’s had minimal impact on our business so far,” Viniar said in response to a question on the call. “It might affect us versus some competitors who might have lower spreads, but we also compete on execution as well and our execution tends to be pretty good.”
Goldman Sachs has about $5 billion in “plain vanilla debt” maturing by the end of the year, Viniar said. “We’ll decide as the quarter goes on whether we want to replace it or we want to wait for a better time.”
Revenue from fixed-income, currencies and commodities, typically the firm’s biggest source of revenue, dropped 36 percent to $1.73 billion from $2.69 billion a year earlier and increased from $1.6 billion in the second quarter.
Excluding DVAs the business produced $1.43 billion, which fell short of the $2.27 billion that Citigroup reported and the $2.8 billion that JPMorgan Chase & Co. (JPM) reported on the same basis.
The company’s average value-at-risk, a measure of the amount of money the firm estimates it could lose in a single day, was little changed during the quarter at $102 million compared with $101 million in the prior period. Viniar told analysts that the company’s value-at-risk, or VaR, climbed at the end of the quarter as market volatility, one of the ingredients of VaR, increased. Most of the rise took place in the firm’s bets on interest rates, Viniar said.
“I would expect, assuming we made no changes to positions at all, that our VaR would be fairly significantly higher in the fourth quarter than the third quarter,” he said.
Equities trading revenue rose to $2.33 billion from $1.98 billion a year earlier and from $1.92 billion in the second quarter. Excluding DVAs, Goldman Sachs’s $2.18 billion of equities trading revenue beat Bank of America, Citigroup and JPMorgan Chase.
Investment banking, overseen globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, generated $781 million of revenue in the third quarter, down from $1.45 billion in the second quarter and $1.16 billion in the third quarter of last year. The company ranks No. 1 among advisers on global takeovers announced this year and also has the top spot among managers of global equity and equity-linked offerings, according to data compiled by Bloomberg.
Investment banking’s relative contribution within the group has grown this year. The business generated 15 percent of Goldman Sachs’s revenue in the first nine months of the year, up from 11 percent in the same period last year.
Compensation and Benefits
Compensation and benefits, Goldman Sachs’s biggest expense, fell 59 percent to $1.58 billion in the third quarter from $3.83 billion in the same period last year. The amount set aside to pay employees in the first nine months of the year fell 24 percent to $10 billion, or enough to pay each employee $292,836. That compares with $13.1 billion in the first nine months of 2010, or enough to pay each of the firm’s 35,400 employees at the time $370,700.
Goldman Sachs lost $2.12 billion, or $4.97 per share, in the fourth quarter of 2008 after markets plunged following the bankruptcy of Lehman Brothers Holdings Inc. Goldman Sachs rebounded to record profit in 2009 as asset values climbed and the company slashed pay.
To contact the reporter on this story: Christine Harper in New York at email@example.com