By Saabira Chaudhuri
Goldman Sachs Group Inc. said first-quarter net income fell 10%,
but results comfortably topped analysts' estimates, sending the
stock higher in premarket trading.
The New York investment bank saw a slump in trading that
overshadowed a drop in expenses. Still, the better-than-expected
results driven by strength in investment banking pushed shares
higher 1.1% in recent premarket trading.
Goldman Sachs noted its investment-banking revenues hit the
highest quarterly level since 2007.
Goldman posted net income of $2.03 billion, compared with
year-earlier net income of $2.26 billion. Earnings per
share--reflecting the payment of preferred dividends--were $4.02,
while net revenue fell 7.6% to $9.33 billion. Analysts polled by
Thomson Reuters had expected per-share earnings of $3.45 on revenue
of $8.7 billion.
Goldman's results come as its executives continue to navigate a
difficult regulatory environment in which banks have been pushed
out of riskier businesses. Historically, Goldman has made much of
its profits taking calculated risks while brokering deals for
clients, a philosophy encapsulated by a past Goldman executive as
being "long-term greedy."
Goldman's FICC trading business, a crucial profit engine for
more than a decade, has faced headwinds similar to those buffeting
rivals. Fretting over turmoil in emerging markets, many investors
have pulled back from taking risks, analysts say.
That was apparent in Goldman's first-quarter fixed-income
trading revenue, which fell 11% from a year earlier to $2.85
billion. Still, FICC revenue climbed 65% from the fourth
quarter.
Goldman Sachs said the year-over-year FICC decline reflects
"significantly lower net revenues in interest rate products,
currencies and mortgages, as well as lower net revenues in credit
products." Commodities were a relative bright spot, rising when
compared with the first-quarter of 2013.
The results come after rival Morgan Stanley earlier on Thursday
reported a surprise increase in FICC trading from a year earlier,
reflecting what the company said was a "strong performance in
commodities and solid results in credit and securitized products,
despite lower volumes across most fixed income businesses."
Several U.S. banks results have logged declines in the FICC
business. At J.P. Morgan Chase & Co., fixed-income revenue fell
21% from the year earlier and at Citigroup Inc. it fell 18%. Bank
of America Corp., whose fixed income results took a hit a year ago
thanks to a settlement with bond insurer MBIA Inc., had reported
revenue from its fixed-income unit jumped 6.2% from the year
earlier, but fell 1.7% once adjusted for debt. Meanwhile, at Morgan
Stanley fixed-income revenue rose 35%, or 9.2% on an adjusted
basis.
Total equities revenue at Goldman Sachs--which includes trading
and its prime brokerage operations--dropped 17% from a year earlier
to $1.6 billion amid what the investment bank called "challenging
market-making conditions, particularly in Japan and certain
emerging markets."
In Goldman's investing and lending segment--which is made up of
the firm's portfolio of investments in public and private equities
and debt--revenue dropped 26% from a year earlier and from the
prior quarter to $1.53 billion.
Overall, investment banking revenue rose 13% from a year earlier
and 3.6% from the fourth quarter to $1.78 billion. Advisory revenue
at Goldman Sachs was a bright spot, rising 41% from a year earlier
to $682 million, which the firm said reflected increased client
activity in Europe.
Analysts at Credit Suisse recently said they expect Goldman
Sachs "to post its best first quarter M&A results post crisis,
significantly outperforming the broader industry."
Equity underwriting rose 12% from a year earlier but revenue
from debt underwriting fell 4.9%, which Goldman said reflected
"significantly lower net revenues from commercial mortgage-related
activity."
Goldman has attempted to counter its trading shortfall by
reducing expenses, including the amount it sets aside for
compensation. For the quarter, the bank's compensation and benefits
expense fell 7.6% from a year earlier to $4.01 billion. As of the
quarter's end, Goldman had a total of 32,600 employees, up from the
32,000 a year ago, but lower than the 32,900 reported for the
previous quarter.
For the first quarter, Goldman reported net provisions for
litigation and regulatory proceedings of $115 million, compared
with $110 million and $561 million reported for the year earlier
and the fourth quarter respectively. Overall operating expenses
dropped 6.1% from the year earlier, although they climbed 21% from
the fourth quarter to $6.31 billion.
Investors have been paying close attention to the returns
offered by investment banks as being indicative of a broader
upswing in the operating environment. But on Thursday, Goldman
reported its annualized return on equity for the quarter was down
at 10.9% from 12.4% a year earlier and 12.7% in the prior
quarter.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and
Justin Baer at justin.baer@wsj.com
Access Investor Kit for The Goldman Sachs Group, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=A591&isin=US38141G1040
Subscribe to WSJ: http://online.wsj.com?mod=djnwires