Goldman's Profit Drops Amid Shift Away From Trading -- WSJ

Date : 04/16/2019 @ 8:02AM
Source : Dow Jones News
Stock : Goldman Sachs Grp. (The) (GS)
Quote : 205.91  -1.99 (-0.96%) @ 1:00AM
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Goldman's Profit Drops Amid Shift Away From Trading -- WSJ

Goldman Sachs (NYSE:GS)
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By Liz Hoffman 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 16, 2019).

Goldman Sachs Group Inc.'s first-quarter profit fell sharply as trading and underwriting slowed, showing the urgency of the firm's pivot away from those unpredictable Wall Street businesses.

The bank's profit of $2.25 billion, or $5.71 a share, was 21% lower than the same period a year ago. Revenue fell in three of Goldman's businesses and was flat in its fourth. Cost cuts and lower taxes helped profits top muted expectations, but shares still fell more than 3% in afternoon trading.

Goldman is in the midst of a multiyear effort to diversify away from trading, where profits have dwindled since the financial crisis. It is growing a consumer bank, developing a cash-management product for corporate treasurers, partnering with Apple Inc. on its first credit card and building data services it hopes will lure new types of trading clients.

But the pivot is a slow one. The bank's first-quarter results show that, for now, Goldman is stuck in limbo, spending more than $1 billion on the new initiatives while still tethered to old standbys that are struggling.

"We're looking to build value over the next three to five years, not over the next couple of quarters," Chief Executive David Solomon, who took the job last fall, said on a conference call with analysts.

Trading revenue fell 18% from a year ago, when a burst of volatility sparked activity. Declines were steepest in stock trading as hedge funds placed fewer bets and calm markets lessened the demand for instruments that protect against price swings.

Among other big U.S. banks, JPMorgan Chase & Co. reported a 17% decline in overall trading. Citigroup Inc. reported a 5% drop on Monday.

But without the big retail businesses and lending books that bolster JPMorgan and Citigroup when markets cool, Goldman is more beholden to its traders and investment bankers. Investors being asked for patience are looking for signs of progress.

To that end, Mr. Solomon and Chief Financial Officer Stephen Scherr have set a slew of financial targets and on Monday promised more. That kind of transparency is unusual for Goldman, which historically shared little and relied on steady profits to placate shareholders.

One number they are hyping is net interest income, the difference between what Goldman earns on loans and what it pays for its deposits. A number more traditionally associated with Main Street lenders, it has been rising at Goldman as the firm leans into lending and gathers retail deposits, a cheaper source of funding.

Shareholders consider it a steadier source of revenue and so tend to assign it a higher value. Goldman's net interest income rose 50% from a year ago to $835 million, though it remains barely a blip compared with JPMorgan's $14 billion.

Goldman's Marcus platform, launched in 2016 and expanded into the U.K. last year, has $46 billion in deposits. They give Goldman cheaper funding than borrowing overnight against its holdings of securities.

The firm is wrapping up deep-dive reviews on each of its business units and processes, trying to find costs to cut and solve frustrations for clients. It has reassigned 7,500 engineers and support staff from a centralized function into its operating divisions to tackle high-priority projects and revamped how the firm's most important clients are covered.

Even as it pushes into Main Street banking, Goldman also is retreating from some corners of traditional high finance. Mr. Scherr confirmed Monday that the firm would scale back in some commodities trading and seek to raise outside capital for investment funds rather than using its own money for deals. Together those changes, earlier reported by The Wall Street Journal, signify a cultural shift that emphasizes client service over proprietary trading.

They are also likely to free up capital that could be returned to shareholders or plowed back into new ventures. Regulators require banks to hold extra capital if they engage in trading and principal investing.

Goldman's return on equity, a closely watched measure of how profitably the company spends shareholders' money, was 11.1% in the quarter. The bank announced an increase of 5 cents to its per-share quarterly dividend, to 85 cents, and continued buybacks that brought the number of shares outstanding to an all-time low, which boosts per-share earnings.

Write to Liz Hoffman at liz.hoffman@wsj.com

 

(END) Dow Jones Newswires

April 16, 2019 02:47 ET (06:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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