By Peter Rudegeair And Justin Baer
Goldman Sachs Group Inc. reported a drop in quarterly profit
after the Wall Street firm set aside more than $1 billion to cover
legal costs and debt-trading revenue fell.
Shares in the New York-based bank fell about 0.5% in morning
trading.
Goldman said it had earned a second-quarter profit of $1.05
billion, or $1.98 a share. The firm set aside $1.45 billion in
provisions for "mortgage-related litigation and regulatory
matters," reducing its per-share earnings by $2.77. Analysts polled
by Thomson Reuters had expected earnings of $3.89 a share.
The results fell short of the profit of $2.04 billion, or $4.10
a share, the bank reported in the same period of 2014.
The legal expenses marred what was a strong quarter for many of
Goldman's businesses, including investment banking and stock
trading. But the firm's results had beaten estimates handily in the
first quarter, and by July, many investors were betting that
Goldman would do so again Thursday.
"Expectations were pretty high," said UBS AG analyst Brennan
Hawken.
Revenue fell to $9.07 billion, but beat analysts' average
estimate of $8.78 billion.
Goldman's results contrasted with Citigroup Inc.'s, which beat
expectations Thursday morning in part because it had moved past
some of its biggest legal headaches from the crisis. Goldman,
though, is one of the remaining big U.S. banks that haven't
resolved federal and state investigations over crisis-era mortgage
practices. The Wall Street Journal reported in June that the
Justice Department and state officials were readying settlements
with up to nine U.S. and European banks, including Goldman.
Goldman is expected to pay more than $2 billion to resolve those
claims, or close to the $2.6 billion rival Morgan Stanley agreed to
in its preliminary settlement that the firm reached with the
Justice Department earlier this year, people familiar with the
matter have said.
"We saw Morgan Stanley settle a couple quarters ago, and we knew
Goldman was going to come soon," Mr. Hawken said.
Banks typically reserve for future legal expenses as settlement
talks with regulators proceed, narrowing the range of potential
settlement costs. In May, the firm raised the top range of its
"reasonably possible" legal expenses above what it already set side
to about $3.8 billion, from $3 billion in February.
In addition to legal expenses, Goldman's trading results dragged
down earnings after a strong start to the year. Revenue in that
division was $3.60 billion in the quarter, down 6% from $3.83
billion in the same period a year ago.
Revenue from debt, currencies and commodities trading fell 28%
to $1.60 billion from $2.22 billion, a steeper drop than
competitors J.P. Morgan Chase & Co. and Bank of America Corp.
experienced.
Equity-trading revenue rose 24% to $2.0 billion from $1.61
billion.
Goldman's investment-banking division reported second-quarter
revenue of $2.02 billion, up 13% from $1.78 billion from the same
period of 2014. In merger advisory, a business where Goldman is the
industry leader, fees were $821 million, a 62% increase compared
with $506 million a year earlier.
In investing and lending division, where Goldman houses
portfolios of direct investments in equities and debt, revenue
decreased 13% to $1.80 billion from $2.07 billion a year
earlier.
Goldman's investment-management business reported revenue of
$1.65 billion, up 14% from a year ago.
Due in part to legal costs, firmwide expenses rose about 16% to
$7.34 billion from $6.30 billion in the second quarter of 2014.
Compensation and benefits expenses totaled $3.81 billion, down 3%
from $3.92 billion in the second quarter last year. As a share of
revenue, compensation and benefits were 42%, down from 43% a year
ago.
Goldman bought back 1.2 million shares during the second quarter
at a total cost of $245 million. That's less than the $1.25 billion
in shares it repurchased in the second quarter of 2014. Earlier
this year, the investment bank had to lower its request to return
capital for the second consecutive year after the Federal Reserve
nixed its original plan.
Shares in Goldman have risen 9.9% since the start of 2015,
beating most big-bank peers.
Write to Peter Rudegeair at peter.rudegeair@wsj.com and Justin
Baer at justin.baer@wsj.com
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