Goldman Sachs Group said quarterly earnings tumbled 82%, 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.
Goldman shares were down 2,3% in early trading to $142,31. The bank’s results weighed on Wall Street stocks, which opened lower.
“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.”
Second-quarter net income was hurt by several one-time charges, including a $550-million settlement of civil fraud charges brought by the Securities and Exchange Commission (SEC) and a $600-million expense related to a UK 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 9,5%. Over the prior four quarters, the average was close to 25%.
The bank said client activity fell in the second quarter, particularly in May and June. It blamed worry about global growth rather than client concerns about the SEC civil fraud charges. The bank also evidently took less trading risk during the quarter.
Excluding the cost of the SEC settlement, Goldman reported earnings per share of $1,72.
Earnings applicable to common shareholders fell to $453-million, or 78 cents a share, from $2,7-billion, or $4,93 a share, a year earlier.
Revenue fell to $8,84-billion from $13,76-billion.
The SEC civil fraud charges stemmed from Goldman’s marketing and packaging of the Abacus collateralised debt obligation. The bank agreed to settle the case last Thursday.
Trading
Fixed income trading revenue, which powered the bank’s rebound from the financial crisis, fell to $4,4-billion from $6,8-billion a year earlier.
Investment banking revenue declined to $917-million from $1,4-billion. Although merger advisory revenue rose 28% to $472-million, debt and equity underwriting revenue fell 58% to $445-million.
Equity trading revenue fell 62% to $1,2-billion.
By one measure, the bank took less trading risk during the quarter. Its value-at-risk, or the maximum possible losses on 95% 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.
As Goldman’s earnings swung lower, so did its set-aside for compensation. The firm slashed its compensation and benefits expense to $3,8-billion from $6,6-billion a year ago. — Reuters