By Justin Baer, Ryan Dezember and Christina Rexrode
Wall Street's biggest names are getting their swagger back.
Goldman Sachs Group Inc., Citigroup Inc. and Blackstone Group LP
each posted blowout earnings Thursday that topped analysts'
expectations, signaling that many of the financial industry's
cylinders are firing.
The results were particularly notable at Goldman, which received
a big boost from its trading desks--a core focus for the firm.
Goldman had stuck by those businesses even as waves of new
regulations drove rivals to focus on less risky and
capital-intensive financial services, and its executives enjoyed a
told-you-so moment Thursday morning.
At a meeting in the auditorium of Goldman's downtown Manhattan
headquarters, the firm's chairman and chief executive told his
managing directors to savor briefly the occasion before getting
back to work, people familiar with the matter said. The results,
Lloyd Blankfein told the group, marked the culmination of years of
work to position the firm for the postcrisis era, the people
said.
Goldman earned $2.84 billion, up from $2.03 billion, in the same
period of 2014. Revenue rose 14% to $10.62 billion, the highest
level in four years, on strong gains from trading and
merger-advisory fees.
Goldman's stock traders had their best quarter since 2010. The
investment-banking division hit a seven-year high. Revenue from
bonds, currencies and commodities trading rose from a year earlier
for the first time in more than a year.
The good times on Wall Street were underscored by a relatively
new entrant: Blackstone, the giant investment firm that has become
one of the world's financial powerhouses through leveraged buyouts,
real-estate assets and other deals. The firm said its first-quarter
profit more than doubled to $629 million and set several
profitability records as it sold assets at big gains.
The profit enabled Blackstone to pay out an 89-cent quarterly
dividend, the largest in its history and more than the firm has
paid out for many full years.
Blackstone and its rivals are some of the biggest clients of
investment banks like Goldman and Citigroup, using them for
everything from underwriting initial public offerings of companies
they own to funding their debt-laden takeovers. Blackstone alone
paid out $172 million to investment banks during the first quarter,
up 48% from a year earlier, Dealogic estimates--by far the most of
any private-equity firm.
Emblematic of the type of deals Blackstone paid bankers to
execute was the sale in January of about $509 million worth of
stock in arts-and-crafts retailer Michaels Cos. Blackstone, Bain
Capital LLC and other investors tapped banks including Goldman and
J.P. Morgan Chase & Co. to sell the shares, allowing them to
keep a 4% cut as a commission.
Goldman and Citigroup each posted strong advisory results,
following on similar gains posted by J.P. Morgan and Bank of
America Corp. earlier in the week. Those profit are likely to
continue rolling in as more 2014 deals close and given that 2015
has been an even better year so far for mergers.
Analysts and investors were quick to point out that Wall Street
results often peak during the first quarter and tail off during the
summer months as markets turn less active. "Let's not get ahead of
ourselves," UBS AG analyst Brennan Hawken said.
Indeed, Citigroup, which reported a larger-than-expected 21%
jump in profit to $4.77 billion, bucked some of the industry
trends. Citigroup's trading revenue was down 9.5% to $4.36 billion
from $4.81 billion a year ago, hurt in part by getting caught off
balance when the Swiss franc surged earlier this year after the
Swiss National Bank unexpectedly lifted its cap on the
currency.
Citigroup's overall performance was helped by aggressively
cutting costs.
Amid a flurry of new rules on bank capital and risk taking that
pushed many rivals from various corners of trading businesses,
Goldman has argued its role as an intermediary would remain as
essential in the postcrisis world as it had in past eras--and that
the firm would profit from its perseverance when the markets turned
more active again.
"They have probably silenced critics of their business, at least
for a little while," Mr. Hawken said.
Goldman's return on equity, a measure of banks' profitability,
rose to 14.7% in the first quarter, on an annualized basis. It was
the firm's highest since late 2012, defying investors' skepticism
on whether big banks could ever again come close to producing the
20-plus returns that seemed routine in the years before the
financial crisis.
Goldman finance chief Harvey Schwartz on a call with analysts
said the first quarter was "a good, solid performance," then noted
"our aspiration to deliver for our shareholders are higher."
The moment wasn't lost on investors and analysts, who caught a
flash of the Goldman confidence that at times seemed more like
defensiveness when the businesses models of rivals such as Morgan
Stanley and UBS drew praise.
"It kind of perked up my ears," said Mike Mattioli, a portfolio
manager at John Hancock Asset Management, a unit of Manulife
Financial Corp. and one of Goldman's largest shareholders.
Goldman shares fell 0.9% after a sharp rise early in the week.
Citigroup shares gained 1.5% and Blackstone ticked up 0.3%.
Glenn Schorr, an analyst with Evercore ISI, said it remains to
be seen if Goldman can sustain these types of results. But
Thursday's earnings revealed how, under the right conditions,
"Goldman could be the old Goldman" again.
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