UPDATE 3-Goldman Sachs profit doubles on investment gains, lower tax rate
* Profit $3.70/share vs Wall Street view $2.82
* Revenue from investing and lending jumps
* Return on equity 10.5 pct
* Goldman shares down 1.6 pct
July 16 (Reuters) - Goldman Sachs Group Inc on Tuesday said quarterly profit doubled, helped by investment gains and a lower tax rate, but investors fretted that the results would not easily be repeated and sent the bank's shares lower.
Goldman's investing and lending segment, which tracks its investments in private equity deals, publicly traded stocks, loans and bonds, produced nearly seven times as much revenue in the second quarter as it did in the same period last year, much more than analysts expected.
Investors questioned how much revenue growth the bank can generate by investing its own capital under new regulations. The Volcker rule, part of the 2010 Dodd-Frank financial reform law, limits banks' market wagers with their own money. But the industry has years to comply with the law, and Goldman believes most of its investing and lending activities already do.
The bank's return on equity, a measure of how effectively it can wring profit from shareholders' money, was just 10.5 percent in the second quarter, just above the 10 percent returns investors demand for supplying capital to the firm.
"They're just barely above decent levels there. Investors are seeing that they have little chance of getting back to the 2006 or 2007 type levels because of increased equity and capital requirements," said Morningstar analyst Michael Wong. Before the financial crisis and resulting regulatory changes, Goldman could earn returns on equity above 30 percent.
Overall, Goldman's net income rose to $1.86 billion, or $3.70 per share, in the second quarter from $927 million, or $1.78 per share, a year earlier.
Analysts on average had expected $2.82 per share, according to Thomson Reuters I/B/E/S.
Net revenue rose 30 percent to $8.61 billion.
Keith Horowitz, a bank stock analyst at Citigroup, said that in addition to better-than-expected results from investing and lending, Goldman also benefited from the decline in its effective tax rate.
The bank said its tax rate declined because it decided that certain earnings outside the United States will be permanently reinvested overseas, and also because it earned more money abroad. Chief Financial Officer Harvey Schwartz told analysts on a conference call that the lower rate was not guaranteed to last.
Goldman shares were down 1.6 percent to $160.30 near midday on the New York Stock Exchange.
The biggest contributor to revenue was fixed income, currency and commodities (FICC) trading, which reflects trading with clients. Revenue there rose 12 percent to $2.46 billion.
Goldman's results echoed similar trends in the investment banking units of JPMorgan Chase & Co and Citigroup Inc , whose fixed-income trading businesses also benefited from improvements in trading and underwriting revenue in the second quarter.
The biggest source of revenue growth was the investing and lending division, where revenue surged to $1.42 billion from $203 million a year earlier. JMP Securities analyst David Trone had expected the segment to produce revenue of $850 million.
The segment's results have oscillated wildly since it was set up in 2009, delivering anywhere from $2.9 billion to $7.5 billion in revenue annually.
New regulations, particularly capital rules, have cut into the earnings potential of many of Goldman's biggest businesses. The bank has not disclosed information about its capital and leverage levels under new Basel III rules and proposed U.S. regulations.
On the conference call, analysts pressed the bank to reveal more information. Schwartz responded, "Our first assessment is we're very comfortable with where we are."
He later added that "the only reason I'm not being more specific about numbers at this stage is the team really hasn't had the time to go through the kind of diligence that we would normally want them to."
Still, Goldman managed to produce a return on equity above the 8 percent some analysts were expecting and the 10 percent benchmark that analysts say is break-even to meet a bank's cost of capital.
Goldman's investment banking revenue rose 29 percent to $1.55 billion, helped by a 45 percent increase in underwriting revenue.
"Improving economic conditions in the U.S. drove client activity," Chief Executive Lloyd Blankfein said in a statement, adding that "the operating environment has shown noticeable signs of improvement."