Goldman Sachs Group posted a 72% decline in quarterly earnings as trading revenue dropped, and the bank warned there were fewer opportunities to make money in the current environment.
The results were stronger than many analysts had expected, but with Goldman discussing risks to future profits, the bank’s shares fell 1,4% to $151,64.
Goldman has long been viewed as an earnings machine, consistently generating some of the highest returns on Wall Street. But United States 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 53% 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.
On Tuesday, Goldman said first-quarter trading revenue had rebounded 83% from the fourth quarter. But on a conference call with investors and analysts, it noted the hurdles it faces in the future.
Goldman’s clients are still cautious, given the economic and regulatory environment, and the bank still sees 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. Goldman’s fixed income, currency, and commodity trading revenue fell 28%, while JPMorgan Chase & Co posted a drop of just 4%. Overall, Goldman’s revenue fell 7% in the first quarter.
Viniar conceded that the bank’s market share in trading has fallen, and characterised current levels as “more normalised”.
Goldman posted a profit to common shareholders of $908-million, or $1,56 a share. Analysts’ average forecast was 82 cents a share, according to Thomson Reuters I/B/E/S.
Regulatory scrutiny
The bank bought back $5-billion of preferred shares from Warren Buffett’s Berkshire Hathaway in the quarter, resulting in a one-time charge of $1,64-billion.
Excluding the preferred share redemption, the bank would have earned $4,38 a share.
A year earlier, it posted earnings of $3,3-billion, or $5,59 a share.
Goldman set aside $5,23-billion for employee compensation in the quarter, a 5% decline from a year earlier.
The bank’s return on average common shareholders’ equity was 12,2% in the quarter, but excluding the preferred redemption it was 14,5%. By one rule of thumb, a 14,5% 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 hold back the stock,” said Keith Davis of Farr, Miller & Washington, who holds Goldman shares. — Reuters