Goldman Sachs beats profit estimates, but shares decline on legal costs, underwhelming trading

Key Points
  • Goldman crushed the profit estimate on better-than-expected results from every division except trading. 
  • President David Solomon will officially take over as CEO on Oct. 1, adding the chairman title at year-end. 
Goldman Sachs' 'bread and butter' is investment banking, says analyst
Goldman Sachs' 'bread and butter' is investment banking, says analyst

Goldman Sachs said profit surged 40 percent to $2.57 billion in the second quarter, exceeding analysts’ estimates on better-than-expected revenue from every major business with the exception of trading. The stock slipped as the company said legal and regulatory costs increased.

Earnings of $5.98 per share beat the $4.66 estimate of analysts surveyed by Thomson Reuters. Companywide revenue rose 19 percent to $9.40 billion, higher than the $8.74 billion estimate. Three of the New York-based bank's four main businesses all posted "surprisingly strong" results, thanks to higher private equity gains and fees from equity issuance, according to Atlantic Equities.

Goldman said non-compensation expenses surged 24 percent to $2.66 billion from a year earlier after setting aside more money for litigation and regulatory proceedings. That was about $200 million more than analysts had been expecting. The bank's shares declined 1.2 percent at 11:24 a.m. in New York trading.

Goldman's traders essentially matched expectations, unlike at rival J.P. Morgan Chase where bond and stock traders posted stronger-than-expected results. The fixed income trading business generated $1.68 billion in revenue, compared with analysts' expectations for $1.65 billion. Equity trading produced $1.89 billion, slightly below the $1.91 billion estimate. The bank also cited trading conditions that were "generally less favorable" compared with the start of the year.

"In the equities business, the fact is, you were flat year over year in the second quarter, at a time when your peer group that has reported so far were up on average 20 percent," said Guy Moszkowski, analyst at Autonomous Research, during a conference call.

The firm's investing and lending division, sometimes referred to as Goldman's merchant bank, posted a 23 percent increase in revenue to $1.94 billion on sales of private equity stakes, exceeding the estimate by almost $300 million. Investment banking generated 18 percent more revenue, rising to $2.05 billion, $210 million more than expected, mostly driven by strength from initial public offerings. Investment management posted a 20 percent increase in revenue to $1.84 billion, $160 million more than expected.

"It was disappointing that much of the revenue beat came from" the investing and lending and investment management units, Brian Kleinhanzl of KBW said in a research note. "We expect shares to be weak relative to peers as investors will not like a beat based on episodic revenues."

On the eve of celebrating its 150th anniversary, Goldman is at a crossroads. After 12 years running the investment bank, Blankfein announced that David Solomon, the bank's current president, will take over as CEO on Oct. 1 and add the chairman title at the start of next year.

Stung by an industrywide slowdown in trading and restrictions on risk-taking, Goldman has yet to regain the profitability it had in the wake of the financial crisis. The new CEO will have to focus on the firm's historic strengths of trading and deal-making, while aggressively expanding a new consumer-facing business.

Last month, Goldman was forced to maintain its dividend and share buyback plans unchanged from last year after fumbling a key part of its annual stress test. Its shares are 9.2 percent lower this year before Tuesday, underperforming rivals including J. P. Morgan Chase and Morgan Stanley and the broader indexes.

Here’s what Wall Street expected:

  • Earnings: $4.66 per share, an 18 percent increase from a year earlier, according to the average analyst estimate compiled by Thomson Reuters.
  • Revenue: $8.74 billion, an 11 percent increase, according to the average estimate compiled by Thomson Reuters.
  • Trading revenue: Fixed income at $1.65 billion, equities at $1.91 billion, according to FactSet.