Goldman Sachs Group Inc.’s profit tumbled 49 percent as fixed-income trading revenue dropped more than its rivals and litigation expenses rose fivefold.
Second-quarter net income fell to $1.05 billion, or $1.98 a share, from $2.04 billion, or $4.10, a year earlier, the New York-based company said Thursday in a statement. Excluding the $1.45 billion legal cost and an accounting adjustment, earnings were $4.49 a share, beating the $3.96 average estimate of analysts in a Bloomberg survey.
The highest investment-banking fees since 2007 weren’t enough to offset the decline in fixed income, which fell amid concern Greece would be forced to abandon the European common currency. Goldman Sachs’s 35 percent drop in bond-trading revenue was steeper than JPMorgan Chase & Co.’s 21 percent decline and the 9.3 percent slide at Bank of America Corp.
That business “was down quite a bit more than we saw at some of the peers,” Devin Ryan, an analyst at JMP Group Inc. in New York, said in a phone interview. “I suspect they had a pretty challenging June; you had some sharp market moves then.”
Legal costs were higher than the previous five quarters combined, as Goldman Sachs continued talks with the U.S. Justice Department over a settlement of a probe into its sales of mortgage bonds leading up to the financial crisis. The bank may pay as much as $3 billion, a person familiar with the talks said last month.
The shares, which climbed 9.9 percent this year through Wednesday, declined 0.8 percent to $211.33 at 8:35 a.m. in New York.
Fixed Income
Fixed-income, currency and commodity trading revenue was $1.45 billion, excluding accounting adjustments. That fell short of estimates of $2.05 billion from Macquarie Group Ltd.’s David Konrad and $2.11 billion from Steven Chubak at Nomura Holdings Inc.
Goldman Sachs’s equities division posted a 21 percent increase from a year earlier to $1.97 billion, excluding accounting charges. That compared with Konrad’s $1.86 billion estimate and a projection of $1.87 billion from Chubak.
Total revenue from sales and trading, led by Pablo J. Salame, Isabelle Ealet and Ashok Varadhan, was $3.42 billion. That compared with $4.51 billion at JPMorgan and $3.33 billion at Bank of America.
Revenue at Goldman Sachs fell 1 percent to $9.07 billion. The firm’s return on equity, a measure of profitability that takes into account how much capital the business uses, was 4.8 percent in the second quarter, compared with 10.9 percent a year earlier. It was 11.5 percent excluding the legal cost.
Pay Ratio
Compensation, the firm’s biggest expense, fell 3 percent to $3.81 billion, or 42 percent of revenue. That was the same percentage as in the first quarter, and down from 43 percent a year earlier. Goldman Sachs has cut the ratio in the years since the financial crisis in an effort to boost returns.
Second-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John Waldron, climbed 13 percent to $2.02 billion. The figure included $821 million of financial-advisory revenue, including fees for takeover advice, an increase of 62 percent. Revenue from underwriting declined 6 percent to $1.2 billion in the quarter, including $603 million from debt underwriting and $595 million for equity offerings.
Goldman Sachs has leaned on revenue gains in investment banking and asset management to cushion the decline from trading, which last year posted the lowest revenue since 2005.
M&A Advice
Goldman Sachs held the top spot among arrangers of global equity, equity-linked and rights offerings for the first half of this year, according to data compiled by Bloomberg. It also ranked first in advising on announced mergers and acquisitions and fifth in underwriting U.S. corporate bonds, the data show.
Investing and Lending, which includes gains and losses on Goldman Sachs’s own investments in stocks, debt, real estate, private equity and hedge funds, as well as loans, posted second-quarter revenue of $1.8 billion, down from $2.07 billion a year earlier.
The segment’s revenue topped estimates of $1.51 billion from Chubak and $1.5 billion from Matt Burnell at Wells Fargo & Co.
Investment-management revenue climbed 14 percent to $1.65 billion as assets under supervision rose to $1.18 trillion.
The firm announced two acquisitions of asset-management businesses since the start of the second quarter. The co-heads of that unit, Timothy O’Neill and Eric Lane, said earlier this year that annual growth will remain above 10 percent in the next few years as more investors shift to actively managed funds and the firm lends more to wealthy individuals.
Goldman Sachs bought back $245 million of stock in the period, the lowest amount since the second quarter of 2010. The firm had to resubmit its capital plan to win Federal Reserve approval in the annual stress test in March, and Chief Financial Officer Harvey Schwartz said in April that buybacks would be smaller in the second quarter than in later periods.
source: Bloomberg
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