Goldman's Profit Drops 11% But Is Above Expectations

Goldman Sachs Group said quarterly earnings fell 11 percent as turmoil in financial markets hit trading and slowed investment banking, yet the firm again exceeded expectations by avoiding major losses on assets slammed by the credit crisis.

Goldman Sachs
Goldman Sachs

Net income at the largest U.S. investment bank fell to $2.09 billion, or $4.58 a share, in the second quarter ended May 31, from $2.33 billion, or $4.93 a share, a year earlier.

Net revenue fell 7 percent to $9.42 billion during a period that included the March panic that fueled the collapse of Bear Stearns.

Analysts on average had expected Goldman to earn $3.42 a share, according to Reuters Estimates. Shares of Goldman, which had rallied during the past week, were up slightly in morning trade.

"They benefited from the disruption at the other investment banks. In tough times, people tend to gravitate toward the stronger financial firms," said Rose Grant, who helps manage $2 billion for Boston's Eastern Investment Advisors.

A breakdown in credit in mortgage markets last year continues to slam banks and securities firms worldwide, forcing financial institutions to write down more than $400 billion of assets. The lack of easy credit also has slowed the pace of buyouts and public offerings.

Lehman Brothers Holdings on Monday reported a quarterly loss of $2.8 billion, fueled by trading and hedging losses, a week after fears the firm was headed for a Bear Stearns-like collapse punished its stock and prompted a management shake-up.

Reflecting on the recent market environment, Goldman Chief Financial Officer David Viniar said markets remain treacherous but likely have moved past the half-way mark of the credit crisis.

"Clearly, the first weeks of March were the bottom, at least up to now. Now there is less concern about systemic liquidity risk. People are focused on individual investments and credit," Viniar told reporters in a briefing. "There is a better tone in that way. Clearly, it is a somewhat less stressed environment."

Not Immune From Credit Issues

Goldman is not immune from the problems caused by a market breakdown, now in its second year. Yet the bank again avoided the massive losses that have humbled its rivals.

The firm absorbed $775 million of losses from credit products, namely buyout financing, including $500 million of losses on hedges that did not perform as planned.

"They have an uncanny ability to stay out of trouble," said Thomas Russo, portfolio manager at Gardner Russo & Gardner in Lancaster, Pa.

Second-quarter revenue from fixed-income trading, normally Goldman's largest business, fell 29 percent from a year earlier to $2.38 billion. Interest rates, commodities, currencies and mortgage business helped offset a steep drop in credit products.

By comparison, Lehman's fixed-income trading swung to a $3 billion loss from revenue of $1.9 billion a year earlier.

Morgan Stanley reports its quarterly results on Wednesday.

Goldman's principal investments generated $725 million of revenue in the quarter, boosted by a gain on its stake in Industrial and Commercial Bank of China.

Investment banking revenue fell 2 percent from a year earlier to $1.69 billion, reflecting the downturn in debt underwriting, though equity issuance rose.

Merger and acquisition fees rose 13 percent, but the firm's backlog of pending investment banking fees decreased during the quarter.

The biggest contributor of the quarter was equity trading, which was little changed at $2.49 billion, as robust client buying and selling offset a drop in proprietary trading.

Since June 11 Goldman shares have surged 12 percent. They are down 15 percent this year, outperforming a 20 percent drop in the Amex Securities Broker Dealer index. In early trade, they rose 1 percent and briefly reached a one-month high.