GS Goldman Sachs Group Inc

Profit climbs 74% in quarter, but firm takes aim at costs as client activity is subdued

By Liz Hoffman and Peter Rudegeair 

Goldman Sachs Group Inc. is getting used to life in the pack.

The firm, long the pre-eminent trader and risk manager on Wall Street, detailed staff cuts Tuesday that could have come from just about any Main Street bank across the country. And in a quarter where most of its rivals got a boost from strong trading, Goldman's gains were more muted as the bank dialed back its risk.

The investment bank run by Chief Executive Lloyd Blankfein detailed the new cost cuts as Goldman continued to grapple with shrinking businesses and skittish clients. Goldman's revenue dropped 13% to $7.93 billion, a sharper drop than at any of the other big banks that have reported second-quarter earnings.

The bank's profit jumped 74% to $1.82 billion, after results in the year-ago period were weighed down by a big legal charge related to Goldman's precrisis mortgage activities.

Chief Financial Officer Harvey Schwartz said the bank continues to face a "more challenging backdrop."

Earlier this year, Goldman quietly embarked on a cost-cutting effort, trimming 2,000 jobs, a handful at a time. On Tuesday, Mr. Schwartz said those reductions would save about $700 million a year, or about 3% of the firm's 2015 expense base.

The cuts include relatively senior traders whose annual compensation can easily top $1 million.

The tactics reflect a Wall Street firm nearly a decade after the financial crisis that is dealing not only with tougher regulations but clients less eager to trade.

Goldman "is dealing with the same challenges everyone else is," said Dave Ellison, portfolio manager of Hennessy Large Cap Financial Fund, which holds shares of the bank. "They're in a business that's not really growing and have to keep chugging along."

The firm's return on equity, a closely watched measure of profitability, stood at 8.7% during the second quarter -- in the middle of the pack this quarter and below Goldman's three-year average of 10.4%.

"You can only make so much money in this type of backdrop," Evercore ISI analyst Glenn Schorr said. "But what Goldman has been great at since the crisis is doing what it takes to support reasonable returns" without cutting so deeply that it risks missing out on bigger profits if better times return to Wall Street. Goldman shares, which rose over the past week as rivals posted strong numbers, ended Tuesday 1.2% lower at $161.41. They are down about 10.4% since the start of 2016, worse than the 7.7% fall in the KBW Nasdaq Bank index of large commercial lenders.

Still, Tuesday's results provided some encouragement after an April update in which the bank produced its lowest revenue for any first quarter since Mr. Blankfein took the top job at the firm in 2006.

Banks started the second quarter with some momentum as investor and corporate confidence returned from a skittish first quarter. Heavy trading precipitated by the Brexit vote in the U.K. helped Goldman's results as well.

But nearly all of Goldman's operating units posted lower quarterly revenue than they did a year earlier. The exception was trading, where revenue grew 2% year over year. Revenue from fixed-income, currency and commodity trading rose 20%, though those gains were offset by a 12% decline in stock trading that the bank attributed to weakness in Asia.

Goldman's trading revenue remains well off its postcrisis highs. The bank brought in $6.8 billion from fixed-income trading in the second quarter of 2009. This year it booked just $1.9 billion, partly explained by a reduction in risk-taking across the business. The value-at-risk -- the amount the bank could lose on a typical day in the quarter -- was $62 million, the lowest level in years.

Excluding an accounting adjustment related to the value of Goldman's debt, the bank's trading revenue rose 8% from 2015's second quarter.

But this year, Goldman gains were smaller than those reported by rivals. At J.P. Morgan Chase & Co., trading revenue rose 25% in the second quarter, while it rose 15% at Citigroup Inc. and by 12% at Bank of America Corp. J.P. Morgan's and Citigroup's trading revenue eclipsed Goldman's by about $1.9 billion and $600 million, respectively, while BofA's was essentially even with Goldman's.

The bigger commercial banks historically have had deeper ties to corporate clients that trade more consistently than hedge funds, a core Goldman clientele battered by low returns and exits by their investors.

In May, Goldman Chief Operating Officer Gary Cohn said the bank was courting corporate clients and asset managers, while accommodating client preferences that have shifted "to more plain vanilla products."

Goldman also is increasing its nascent focus on consumers. Mr. Schwartz said the bank expects to launch its online-lending platform this fall, which will offer loans to individual borrowers.

"We are looking to build a durable business, so it will take time," Mr. Schwartz said.

Goldman's investment-banking revenue fell 11% to $1.79 billion as advisory revenues at Wall Street's top merger shop fell 3% to $794 million. Goldman's estimate of future investment-banking fees also fell.

A bright spot was debt underwriting, where revenue rose 20% amid an uptick in borrowing by highly indebted companies and asset-backed deals.

Meanwhile, fees from initial public offerings and other stock sales fell 55%.

Goldman's investing-and-lending segment -- a roughly $100 billion bucket of public and private securities owned by the bank -- rebounded from a lackluster first quarter, though the $1.2 billion in revenue it posted for the first six months of the year was down 65% from the same period in 2015.

Goldman's investment-management business suffered from a drop-off in incentive fees and clients moving out of more lucrative funds.

Write to Liz Hoffman at liz.hoffman@wsj.com and Peter Rudegeair at Peter.Rudegeair@wsj.com

(END) Dow Jones Newswires

July 20, 2016 02:47 ET (06:47 GMT)

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