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Monday 20 February 2017

Goldman posts 72pc fall in earnings as revenue drops

Results beat analysts' estimates but shares slide 1.4pc amid fears over future profits

Lauren Tara LaCapra and Dan Wilchins

Published 20/04/2011 | 05:00

The bank bought back $5bn of preferred shares from Warren Buffett's Berkshire Hathaway in the quarter, resulting in a onetime charge of $1.64bn. Photo: Getty Images
The bank bought back $5bn of preferred shares from Warren Buffett's Berkshire Hathaway in the quarter, resulting in a onetime charge of $1.64bn. Photo: Getty Images

Goldman Sachs Group posted a 72pc decline in quarterly earnings as trading revenue dropped, and the bank warned there were fewer opportunities to make money in the current environment.

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The results were stronger than many analysts had expected, but with Goldman discussing risks to future profits, the bank's shares fell 1.4pc to $151.64.

Goldman has long been viewed as an earnings machine, consistently generating some of the highest returns on Wall Street.

But US financial reform threatens profits from what historically have been key sources of revenue for Goldman, including trading for its own account and trading derivatives with clients.

In January, the bank posted a 53pc decline in fourth-quarter profit and talked about how client trading volume in December was "dead", and many investors wondered if the bank's return on equity was likely to be permanently lower.

Yesterday, Goldman said first-quarter trading revenue had rebounded 83pc from the fourth quarter. But on a conference call with investors and analysts, it noted the hurdles it faced in the future.

Goldman's clients were still cautious, given the economic and regulatory environment, and the bank still saw the climate as uncertain, chief financial officer David Viniar said.

Trading profit across Wall Street has fallen from the unusually strong first quarter of 2010, but some banks have fared better than others.

Trading

Goldman's fixed income, currency and commodity trading revenue fell 28pc, while JPMorgan Chase & Co posted a drop of just 4pc. Overall, Goldman's revenue fell 7pc in the first quarter.

Mr Viniar conceded that the bank's market share in trading had fallen, and characterised current levels as "more normalised".

Goldman posted a profit to common shareholders of $908m (€634m), or $1.56 a share. Analysts' average forecast was 82c a share, according to Thomson Reuters.

The bank bought back $5bn of preferred shares from Warren Buffett's Berkshire Hathaway in the quarter, resulting in a one-time charge of $1.64bn.

Excluding the preferred share redemption, the bank would have earned $4.38 a share.

A year earlier, it posted earnings of $3.3bn, or $5.59 a share.

Goldman set aside $5.23bn for employee compensation in the quarter, a 5pc decline from a year earlier.

The bank's return on average common shareholders' equity was 12.2pc in the quarter, but excluding the preferred redemption it was 14.5pc.

By one rule of thumb, a 14.5pc return on equity should correspond to shares trading at about 1.45 times their book value, or net accounting value.

With Goldman's shares trading at about 1.2 times their book value based on Monday's closing price, some investors see the stock as cheap.

"Unfortunately, they've got an incredible amount of regulatory scrutiny on them right now and litigation risk. I think that's what holds back the stock," said Keith Davis of Farr, Miller & Washington, who holds Goldman shares. (Bloomberg)

Irish Independent

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