Goldman Sachs Group Inc. declined in New York trading after first-quarter profit fell 21 percent and analysts said the fifth-biggest U.S. bank relied on unpredictable investment gains to beat estimates.
Goldman Sachs dropped $1.96, or 1.3 percent, to $151.82 at 3:22 p.m. in New York Stock Exchange composite trading, the lowest level since Oct. 15. Net income slid to $2.74 billion, the New York-based company said today in a statement.
Chairman and Chief Executive Officer Lloyd C. Blankfein, 56, depended on trading and investments with the firm’s own money to generate 79 percent of first-quarter revenue. The investing and lending segment, which accounted for 23 percent of revenue, is unreliable because results are tied to market moves and because regulators might add restrictions to the business, said some analysts and investors.
“A large part of that beat was driven by larger-than- expected investment gains, which are volatile and could easily fall sharply into the next quarter,” said Richard Staite, an analyst at Atlantic Equities LLP in London who rates the stock “neutral.” “It is still unclear under the new regulations just how much proprietary trading and investing Goldman can do.”
Earnings per common share, which includes the cost of preferred dividend payments to Warren Buffett’s Berkshire Hathaway Inc., dropped to $1.56 from $5.59, beating the 81-cent average estimate of 16 analysts surveyed by Bloomberg.
Goldman Sachs’s biggest businesses, trading and investing, are the ones most affected by new capital requirements drawn up by the Basel Committee on Banking Supervision and by limits on the firm’s proprietary trading and investments in hedge funds and private-equity funds imposed by the U.S.’s Dodd-Frank financial-overhaul law.
Results from the other main businesses, investment banking and asset management, were disappointing, according to analysts including Glenn Schorr at Nomura Holdings Inc. and Richard Bove at Rochdale Securities LLC.
The results show “solid trading, better-than-expected Investing & Lending, and some softness in investment banking and asset management,” Schorr, who rates the company’s shares a buy, said in a note to investors. “Some may question the sustainability of some of the gains in Investing & Lending.”
Bove cut his rating on Goldman Sachs stock to “neutral” from “buy” even as he raised his earnings estimates.
“Particularly disappointing were the advisory results,” Bove wrote in a note to investors, referring to Goldman Sachs’s revenue from providing takeover advice. “Investment management activity was weak.”
Goldman Sachs’s overall net revenue fell 7 percent to $11.9 billion, the company said. Compared with last year’s fourth quarter, revenue increased 38 percent. Annualized return on average common shareholders’ equity, a measure of how well the firm reinvests earnings, decreased to 12.2 percent from 20.1 percent in the first quarter of 2010.
First-quarter revenue from trading fixed-income, currencies and commodities, the firm’s biggest source of revenue, dropped 28 percent to $4.33 billion from $6.02 billion a year earlier, and more than doubled from $1.64 billion in the fourth quarter.
“Looking ahead, we continue to see encouraging indications for economic activity globally,” Blankfein said in the statement.
JPMorgan Chase & Co., the second-biggest U.S. bank by assets, reported last week that its fixed-income trading revenue fell 4 percent to $5.24 billion from a year earlier, and was up 82 percent from the fourth quarter.
Equities-trading revenue at Goldman Sachs fell 7 percent to $2.32 billion from $2.49 billion a year earlier and was up from $2 billion in the fourth quarter.
Revenue from investing and lending, the firm’s second- biggest segment after trading last year, climbed 37 percent to $2.71 billion from $1.97 billion a year earlier and compared with $1.99 billion in the fourth quarter. The business includes Goldman Sachs’s holding in Industrial & Commercial Bank of China Ltd. as well as stakes in companies and other assets held by units like the Special Situations Group or Principal Investment Area.
David A. Viniar, Goldman Sachs’s chief financial officer, told analysts on a conference call that about 20 percent to 25 percent of the investing and lending segment’s revenue is from interest on loans.
“So that is going to be recurring, but that’s a small part of it,” he said.
Without the better-than-expected trading and investing lines, Goldman Sachs wouldn’t have been able to exceed estimates, said Benjamin Wallace, analyst at Grimes & Co. in Westborough, Massachusetts.
“The beat that was delivered was from things people look at as less predictable,” said Wallace, whose firm manages about $1 billion and doesn’t own Goldman Sachs stock. “It goes back to the grand point that Goldman still relies on its trading operations.”
Compensation and benefits, the company’s largest expense, fell 5 percent to $5.23 billion from $5.49 billion a year earlier and accounted for 44 percent of revenue.
Non-compensation expenses rose 23 percent to $2.62 billion, driven in part by an impairment charge of about $220 million on assets held for sale, the firm said. The primary cost related to the firm’s Litton Loan Servicing LP unit, a residential mortgage-servicing company that the firm has said it is trying to sell.
Investment-banking revenue increased 5 percent to $1.27 billion from $1.2 billion. Advisory revenue, which includes fees for takeover advice, declined 23 percent to $357 million from $464 million a year earlier, while fees from debt underwriting climbed 32 percent to $486 million and equity underwriting revenue advanced 15 percent to $426 million.
The firm ranks third this year among advisers on announced mergers, down from the top spot at the same point last year, according to data compiled by Bloomberg. Goldman Sachs’s advisory revenue fell short of JPMorgan’s $429 million in the quarter.
Goldman Sachs tops underwriters of equity and equity-linked offerings globally so far this year and is fifth among managers of high-yield debt sales worldwide, up from seventh at the same point last year, Bloomberg data show.
Goldman Sachs’s backlog of investment-banking transactions increased compared with the end of 2010, the company said.
Revenue from investment management rose 16 percent to $1.27 billion from $1.1 billion a year earlier. Assets under management were unchanged at $840 billion as clients withdrew $12 billion from Goldman Sachs’s funds and market gains increased the value of the assets by an identical amount, the firm said.
“That’s going to be a business where they don’t have the kind of competitive advantage that they do in the others,” said David Trone, head of U.S. banks and brokerage research for JMP Securities LLC in New York, who recommends buying Goldman Sachs shares. “You’re as good as your last performance, not your brand name.”
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