Goldman Shares Fall as Trading Revenue Misses Estimates
Goldman Sachs Group Inc. (GS), the Wall Street bank that generates the highest percentage of revenue from trading, dropped as much as 3 percent after revenue from that business fell more than its rivals.
Goldman Sachs’s first-quarter revenue from trading stocks and fixed-income products fell 12 percent to $5.22 billion, excluding accounting charges. That missed some analysts’ estimates, including $5.48 billion from Oppenheimer & Co.’s Chris Kotowski and $5.25 billion from Credit Suisse Group AG’s Howard Chen. The revenue decline at New York-based Goldman Sachs was bigger than at Citigroup Inc. (C) and JPMorgan Chase & Co.
“Goldman’s trading expertise has less value right now because they can’t deploy it as they used to,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. who rates the stock outperform, told Erik Schatzker on Bloomberg Television. “Trading is going to have a difficult time taking off from this point.”
Fixed-income, currency- and commodity-trading revenue was $3.26 billion, down 9 percent from a year earlier, excluding the accounting charge related to the firm’s own debt. Revenue from the equities division, overseen by co-Chief Operating Officers R. Martin Chavez, Michael D. Daffey and Paul M. Russo, declined 17 percent from a year earlier to $1.96 billion.
Trading and banking activity waned amid the Cyprus bailout and the debate over the U.S. budget and sequestration, Chief Financial Officer Harvey Schwartz said today on a conference call with analysts after the company released quarterly results.
“It’s events like these that create uncertainty for market participants,” Schwartz said. “As the quarter progressed, these concerns impacted both client activity and risk appetite.”
Citigroup (C) yesterday reported that fixed-income trading rose 69 percent from the fourth quarter, topping analysts’ estimates. JPMorgan, the biggest U.S. bank by assets, reported last week that trading revenue fell 5 percent.
Goldman Sachs’s first-quarter net income rose 7 percent to $2.26 billion, or $4.29 a share, from $2.11 billion, or $3.92, a year earlier. That was higher than all 24 analysts’ estimates in a Bloomberg survey.
Revenue climbed 1 percent to $10.1 billion. Compensation, the firm’s biggest expense, fell 1 percent to $4.34 billion and amounted to 43 percent of revenue for the quarter, down from 44 percent a year earlier. The ratio was 38 percent for all of 2012.
“Their comp ratio at 43 percent is always good,” Hintz said. “We think Goldman is trying to boost the performance of trading by repricing their trading operations,” Hintz said, adding that he expects the full-year figure to be below last year’s ratio.
The lower compensation ratio in the quarter doesn’t indicate anything about the firm’s plans for the full year, Schwartz said on the call. He said the firm’s attrition rate was “very manageable.”
“In terms of talent, quite frankly, it feels like one of the better market environments we’ve seen in quite a long time,” he said. “Our ability to acquire and add people to our team seems pretty good.”
First-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, climbed 36 percent to $1.57 billion. That topped JPMorgan Chase & Co. (JPM)’s $1.43 billion in investment-banking revenue for the first time in more than five years.
The figure included $484 million of financial-advisory revenue, including fees for takeover advice, a drop of 1 percent. Revenue from underwriting, a business led by Stephen M. Scherr, climbed to $1.08 billion in the first quarter, including $694 million from debt underwriting and $390 million for equity offerings.
Goldman Sachs held the top spot among arrangers of global equity, equity-linked and rights offerings in the first quarter, according to data compiled by Bloomberg. It ranked second in advising on announced mergers and acquisitions and fifth in underwriting U.S. bonds, the data show. The firm said its investment-banking backlog fell from the end of December.
Investing and Lending, which includes gains and losses on Goldman Sachs’s own investments in stocks, debt, real estate, private equity and hedge funds, as well as loans, posted first- quarter revenue of $2.07 billion, up from $1.91 billion a year earlier and the highest in two years.
Investing and Lending includes Goldman Sachs’s stake in Industrial & Commercial Bank of China (601398) Ltd., that country’s biggest lender, as well as Facebook Inc., operator of the world’s largest social network. The segment also books profits or losses from the Special Situations Group, a proprietary investing unit led globally by Hong Kong-based Jason M. Brown.
“Investing and lending revenues drove the beat, and the market is kind of skeptical that can continue,” said Jeff Harte, an analyst at Sandler O’Neill & Partners LP in Chicago, who rates Goldman Sachs’s stock hold. “A private-equity gain- driven beat is not something you can count on.”
Revenue from asset management rose 12 percent to $1.32 billion. Total assets under management increased $3 billion during the quarter to $968 billion.
Investors are seeking more information about future dividend increases and share buybacks. While Goldman Sachs’s capital proposal was approved by the Federal Reserve last month, the regulator said Goldman Sachs must submit a new plan to address weaknesses related to projections of losses and revenue.
Last year, the bank increased its dividend twice, boosting the quarterly payout to 50 cents a share from 35 cents, and repurchased $4.64 billion of stock after winning Fed approval. The bank said today it held the dividend at that level for its next payout on June 27 and repurchased $1.52 billion in stock during the first quarter.
That was more than the $1.3 billion estimated by Credit Suisse’s Chen. Goldman Sachs also said its board authorized it to buy back another 75 million shares.
Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) reached an agreement with Goldman Sachs last month to settle warrants granted at the height of the 2008 financial crisis, which will make Berkshire one of the bank’s largest shareholders without paying anything.
Berkshire had the right to buy 43.5 million Goldman Sachs common shares for $115 apiece until Oct. 1. Under the deal, Buffett’s firm will get Goldman Sachs stock equal to the difference between the average closing price during the 10 trading days before Oct. 1 and the exercise price, multiplied by 43.5 million.
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