Goldman Sachs reveals 82pc earnings drop
Goldman Sachs Group Inc 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 pre-eminent bank can navigate a shifting industry landscape.
Second-quarter net income of $453m was hurt by one-time charges, including a settlement of a civil fraud suit brought by the Securities and Exchange Commission and a British tax on bank executive bonuses.
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 9.5pc. Over the prior four quarters, the average was close to 25 pc.
"We've grown accustomed to Goldman bucking the trends in (investment banking), but this quarter it seems like maybe they're more susceptible to broader industry issues," said Walter Todd, portfolio manager with Greenwood Capital Associates. "Maybe Superman is turning into Clark Kent."
Goldman Chief Financial Officer David Viniar, on a conference call with reporters, said client activity fell in the quarter. He blamed worry about global growth rather than concern about the SEC suit.
"Hopefully things will pick up and we hope that (return on equity) over the cycle will be higher than this," Viniar said.
Goldman's chief rival, Morgan Stanley, is due to report quarterly earnings tomorrow. Morgan Stanley shares were off 0.8pc in midday trade. Goldman shares were down 0.2pc after seesawing during the morning.
Goldman's weak numbers were expected by analysts after rivals including Bank of America Corp and Citigroup Inc also reported trading and investment banking results were pummeled in the quarter.
"The bad is in the (Goldman) stock," said Anton Schutz, president of Mendon Capital Advisors. "I think it is pretty well built in. The whole group has gotten punished pretty hard and I'm not sure how bad the sins really are."
Viniar underscored the significance of a financial reform package approved by the US Congress but said it was far too early to assess the impact of the new rules.
The legislation targets lucrative trading in risky over-the-counter derivatives and aims to force banks to end trading for their own profits. It will also limit how much large financial firms can invest in hedge funds and private equity funds.
"The new financial regulatory legislation represents the most sweeping change for the financial industry in decades," Viniar said.
Uneasiness over financial reform was just one factor that rattled markets and weighed on trading and underwriting profits in the second quarter.
In a quarter marked by increasing currency volatility, higher risk premiums for corporate bonds and plummeting stocks, client activity dimmed and Goldman scaled back risk.
"Most of our risk is driven by client activity, and there was just so much less in activity in the quarter," Viniar said.
By one measure, the bank took less trading risk during the period. Its value-at-risk, or the maximum possible losses on 95pc 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.