By Peter Rudegeair And Justin Baer
It may be Goldman Sachs Group Inc.'s best "told you so" moment
in years.
The Wall Street firm said Thursday its first-quarter profit
climbed 40%, beating analysts' expectations, as the bank's traders
thrived on busier, more volatile markets.
Goldman in recent years has stuck with its trading businesses
even as many of its peers shifted to safer businesses like
wealth-management and analysts increasingly questioned the firm's
strategy.
This quarter, the formula worked well. Goldman earned $2.84
billion, or $5.94 per share, up from $2.03 billion, or $4.02 per
share, in the same period of 2014, the New York firm reported.
Analysts polled by Thomson Reuters had expected earnings of $4.26 a
share.
Revenue rose 14% to $10.62 billion, the highest level in four
years, on strong gains from both trading and merger-advisory fees.
Analysts had expected $9.35 billion.
"They crushed it," said Jeff Harte, an analyst with Sandler
O'Neill + Partners. "And it wasn't like 'gee, there's one weird
thing driving it.' Trading was strong. Investment banking was
strong. Compensation (expenses) came in below expectations."
The bank's return on equity, a closely watched profitability
metric, rose to an annualized 14.7% from 11.2% last year.
Still, Goldman's shares fell about 0.5% in early trading
Thursday, a sign that investors had been counting on a big increase
in trading and banking revenue. Goldman shares are up 6.5% this
month, best among the six largest U.S. banks.
Since the financial crisis, a flurry of new rules on bank
capital and risk-taking, along with a prolonged slump in client
activity, had forced many big banks to retreat from the various
corners of trading businesses. Many investors have cheered such
moves, saying they reflect an understanding that markets have
changed for good since the crisis.
Goldman has held steady, arguing its role as an intermediary
would remain as essential in the post-crisis world as it had in
past eras-and that the firm would profit from its perseverance when
the markets turned more active again.
"In the long run, when things are good, everybody's going to be
there. When things are bad, you're going to wish you had a
relationship with the people who are committed," Lloyd Blankfein,
Goldman's chief executive, told The Wall Street Journal in
December.
During the first quarter, trading revenue rose to $5.46 billion,
up 23% from $4.45 billion in the same period a year ago. That
compares to a 7% increase in trading at J.P. Morgan Chase & Co.
and a 5% drop at Bank of America Corp.
Within trading, Goldman's revenue from bonds, foreign exchange
and commodities was up 10%, and revenue from equities jumped
46%.
While Thursday's results might have just delivered Mr. Blankfein
his best "told you so" moment in years, investors will now quickly
turn to the second quarter, and beyond, as they hunt for signs that
trading conditions could stay favorable for Goldman and its
peers.
"Given more normalized markets and higher levels of client
activity, we remain encouraged about the prospects of continued
growth," Mr. Blankfein said Thursday in a statement.
Sandler O'Neill's Mr. Harte predicted that the CEO's words would
help lift analysts' per-share profit estimates for the rest of
year, and said both trading and investment-banking revenue should
continue to improve from a year ago.
Goldman's investment-banking division also did its part,
reporting its best quarterly performance since 2007. First-quarter
net revenue in the unit was $1.91 billion, up 7.1% from $1.78
billion from the same period of 2014. In merger advisory, a
business where Goldman is Wall Street's leader, fees were $961
million, a 41% increase compared with $682 million a year
earlier.
In investing and lending, where Goldman houses its portfolios of
debt and equity investments, revenue increased 9.2% to $1.67
billion from $1.53 billion in the first quarter of 2014.
Firmwide expenses rose to $6.68 billion from $6.31 billion in
the first quarter of 2014. Compensation and benefits expenses
totaled $4.46 billion, up 11% from $4.01 billion in the first
quarter last year. As a share of revenue, however, compensation and
benefits fell to 42% from 43% a year ago.
Goldman bought back 6.8 million shares during the first quarter
at a total cost of $1.25 billion. That is less than the $1.72
billion in shares it had repurchased in the first quarter of 2014.
Last month, the investment bank had to lower its request to return
capital for the second consecutive year after the Federal Reserve
refused its original plan.
Corrections & Amplifications
Goldman's investment-banking revenue was $1.91 billion and its
investing and lending revenue was $1.67 billion. An earlier version
of this story mistakenly referred to those numbers as profit.
(April 16, 2015)
Write to Justin Baer at justin.baer@wsj.com
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