Goldman Sachs' Revenue Falls, but Profit Beats Views

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Goldman Sachs said quarterly earnings tumbled 82 percent, coming in well short of expectations, as trading and underwriting revenue slumped, raising questions about how well Wall Street's preeminent bank can navigate a shifting industry landscape.

Goldman shares were down 2.3 percent in early trading to $142.31. The bank's results weighed on Wall Street stocks, which opened lower.

Goldman Sachs
Source: goldmansachs.com

The financial giant said its net income was 78 cents a share in its second quarter, compared with $4.93 a share this time last year.

Excluding one-time items, Goldman earned $2.75 a share, topping analysts' estimates.

Sales for the most recent quarter reached $8.84 billion, down from $13.76 billion in the same period last year.

Analysts who follow the company projected Goldman Sachs to earn $2.08 a share on revenue of $8.94 billion, according to a consensus estimate from Thomson Reuters.

David Viniar, Goldman's chief financial officer, said during a conference call with reporters that there is no way yet to estimate the impact of the new regulations on revenue or profits. He said it could take more than a year as the detailed regulations are written before Goldman can assess their potential impact.

Last week Goldman resolved a major headache by paying $550 million to settle the SEC case. The fraud charges stemmed from Goldman's marketing and packaging of the Abacus collateralized debt obligation.

"It was a tough quarter to interpret coming in. We certainly didn't expect the SEC number, the settlement cost to be included in this quarter. It's not abig deal that it is, but I was thinking of it as more of a third quarter item," Jeffery Harte, managing director of Sandler O'Neil, told CNBC Tuesday.

Weakness in its trading and investment banking divisions also weighed on earnings. Goldman said earnings were also impacted by a $600 million expense related to the UK tax.

But even stripping out those costs, Goldman's return on equity, a measure of the bank's ability to squeeze profits out of shareholders' money, was just 9.5 percent. Over the prior four quarters, the average was close to 25 percent, the company said over a call with reporters that financial regulatory reform represents the most "sweeping change" in the industry in decades.

The bank said client activity fell in the second quarter, particularly in May and June. It blamed worry about global growth rather than client concerns about the SEC civil fraud charges. The bank also evidently took less trading risk during the quarter.

Goldman Q2 Results

"It's a pretty significant slowdown in their overall business: Investment banking revenue was down 36 percent year over year, and fixed income, currency, and commodity trading was down 35 percent," Walter Todd, portfolio manager at Greenwood Capital Associates, told Reuters.

"We've grown accustomed to Goldman bucking the trends in these businesses, but this quarter it seems like maybe they're more susceptible to broader industry issues," he added. "Maybe Superman is turning into Clark Kent."

Shares of Goldman Sachs traded down about 1.1 percent in early market trading Tuesday. Get real-time quotes for Goldman Sachs here.

"The market environment became more difficult during the second quarter and, as a result, client activity across our businesses declined," said Lloyd Blankfein, CEO of Goldman Sachs in a prepared statement.

"Looking ahead we remain focused on helping our clients to raise capital, manage risk and invest for the future, which are all important to economic growth," he continued.

Trading, Underwriting Revenue

Fixed income trading revenue, which powered the bank's rebound from the financial crisis, fell to $4.4 billion from $6.8 billion a year earlier.

Goldman historically has had revenue from its bond, currency and commodities trading business that beat analysts' forecasts. Now, those revenues are slipping as market volatility replaced the steady gains seen through most of 2009 and earlier this year.

"This was really driven by a lack of activity by our clients," Viniar said. Market volatility in the second quarter and concerns about financial regulation and mounting government debts in Europe kept many customers out of the market, he said.

He warned that if customers remain nervous about athe markets, revenue and earnings could remain low in the coming quarters.

Investment banking revenue declined to $917 million from $1.4 billion. Although merger advisory revenue rose 28 percent to $472 million, debt and equity underwriting revenue fell 58 percent to $445 million.

Equity trading revenue fell 62 percent to $1.2 billion.

By one measure, the bank took less trading risk during the quarter. Its value-at-risk, or the maximum possible losses on 95 percent of the trading days during the quarter, fell to $136 million from $245 million in the same quarter of 2009. The second quarter 2010 figure was the lowest in three years.

As Goldman's earnings swung lower, so did its set-aside for compensation. The firm slashed its compensation and benefits expense to $3.8 billion from $6.6 billion a year ago.

—Reuters & AP contributed to this story.