Goldman Sachs profit doubles on investment gains, lower tax rate
Goldman Sachs said quarterly profit doubled, boosted by investment gains and a lower tax rate, but investors fretted that these factors will not be repeated in future periods.
Goldman’s investing and lending segment, which tracks its investments in private equity deals, publicly traded stocks, loans and bonds, produced nearly seven times as much revenue in the second quarter as in the same period last year, much more than analysts expected.
Investors questioned how much revenue growth the bank can generate by investing its own capital under new regulations. The Volcker rule, part of the 2010 Dodd-Frank financial reform law, limits banks’ market wagers with their own money. But the industry has years to comply with the law, and Goldman believes most of its investing and lending activities already do.
Goldman’s effective tax rate dropped to 27 per cent from 32 per cent in part because the bank is electing to keep more of its international income permanently offshore, and because it earned more money overseas. Chief Financial Officer Harvey Schwartz told analysts on a conference call that the lower tax rate was not likely to be repeated.
“It’s tough to get too excited about these numbers because they’re potentially unsustainable,” said Tom Jalics, senior research analyst at Key Private Bank, whose clients own bank shares.
The results underscore the difficulties Goldman and its rivals face in navigating the post-crisis world. With regulators pressing banks to boost capital levels, many of Goldman’s most profitable businesses are earning less. The bank’s return on equity, a measure of how effectively it wrings profit from shareholders’ money, was just 10.5 per cent in the second quarter, a hair above what it would pay for equity funding.
Overall, Goldman’s net income rose to US$1.86 billion, or US$3.70 per share, in the quarter, from US$927 million, or US$1.78 per share, a year earlier.
Analysts on average had expected US$2.82 per share, according to Thomson Reuters I/B/E/S.
Net revenue rose 30 per cent to US$8.61 billion.
The biggest contributor to revenue was fixed income, currency and commodities (FICC) trading, which reflects trading with clients. Revenue there rose 12 per cent to US$2.46 billion.
Goldman’s results echoed similar trends in the investment banking units of JPMorgan Chase and Citigroup, whose fixed-income trading businesses also benefited from improvements in trading and underwriting revenue in the second quarter.
Goldman’s stock fell US$2.76, or 1.7 per cent, to close at US$160.24 on the New York Stock Exchange on Tuesday. The shares are up 64 per cent over the past 52 weeks, and are well above Goldman’s tangible book value of US$141.62 as of June 30, but down from a 52-week high of US$168.18 hit on June 10.
On Goldman’s conference call with analysts, management fielded questions about the bank’s capital and leverage ratios, particularly about whether it was in a good position to meet preliminary US rules for leverage. New proposed regulations came out earlier this month.
“Our first assessment is we’re very comfortable with where we are,” Schwartz said.
He later added that “the only reason I’m not being more specific about numbers at this stage is the team really hasn’t had the time to go through the kind of diligence that we would normally want them to.”
Goldman’s biggest source of revenue growth was the investing and lending division, where revenue surged to US$1.42 billion from US$203 million a year earlier. JMP Securities analyst David Trone had expected the segment to produce revenue of US$850 million.
The segment’s results have oscillated wildly since it was set up in 2009, delivering anywhere from US$2.9 billion to US$7.5 billion in revenue annually.
Goldman’s investment banking revenue increased 29 per cent to US$1.55 billion, helped by a 45 per cent jump in underwriting revenue.
“Improving economic conditions in the US drove client activity,” Chief Executive Lloyd Blankfein said in a statement, adding that “the operating environment has shown noticeable signs of improvement.”
Bond yields jumped during the quarter, which cut into clients’ willingness to take risk, but those concerns have since abated a bit, Schwartz said.
“It does feel like people have recalibrated at this stage,” he said, adding, “Some of this is returning to kind of normal interest-rate levels. It feels good in some respects.”