Goldman Sachs Reports Surprise Profit Increase -- Update

By Liz Hoffman Features Dow Jones Newswires

Goldman Sachs Group Inc. reported a surprise increase in second-quarter profit despite tough conditions in its core trading businesses.

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The Wall Street firm reported earnings of $3.95 a share. Analysts had expected $3.39, on average, down from $3.72 a year ago. Revenue of $7.89 billion fell from $7.93 billion in the second quarter of last year, and beat analyst expectations of $7.52 billion.

Rivals including J.P. Morgan Chase & Co. and Citigroup Inc. reported declines in trading businesses last week, and Bank of America Corp. followed Tuesday morning. Those banks offset trading slumps with gains in other businesses such as commercial lending.

Goldman's boon came from a segment it calls "Investing and Lending," which isn't a distinct operating unit but rather encompasses loans and equity investments that Goldman makes in various parts of its business. Revenue increased 42% year-over-year, mostly from higher valuations for Goldman's stakes in private companies, many of them technology startups.

For all Goldman's changes since the financial crisis, the firm run by Chief Executive Lloyd Blankfein is still heavily dependent on arranging big, complex trades and deals for corporate and institutional clients. Demand for those services has flagged as placid markets have churned higher and companies have delayed some deals, awaiting signs from Washington on tax and regulatory reform.

Banks rely on idiosyncratic events like the U.K.'s Brexit vote or the U.S. presidential election to spur trading. There have been fewer of those kind of events so far this year.

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Goldman reported a 17% decrease in trading revenues, the steepest of any big bank to report second-quarter earnings yet. Trading revenue fell 14% at J.P. Morgan, 9% at Bank of America and 7% at Citigroup.

Revenue from trading bonds and other fixed-income products dropped 40%. That business stumbled badly in the first quarter and has generally struggled to find its footing as volatility remains low and credit spreads -- the gap between bids and offers where banks make their money -- have narrowed.

The story was better in equities, which posted its best quarter in two years. Revenues of $1.89 billion jumped 17% from a year ago.

Goldman was once the stock-trading king of Wall Street -- it virtually invented the large institutional "block trade" in the 1960s -- but lost the crown to Morgan Stanley in 2014 and has fallen further behind since.

Executives say the firm has invested in technology that will take time to bear fruit, like the 2015 purchase of a Swedish firm that specializes in ultrafast exchange hookups.

Investment-banking, the business of arranging mergers and helping companies raise money, reported a 3% decline in revenue from a year ago. Goldman has leaned hard on that unit in recent years, though there are signs that it also may be slowing. A record deal boom in 2015 and 2016 is cooling, and some companies have been postponing deals as they wait to see if the Trump administration can achieve promised tax and regulatory changes.

Goldman's return on equity, a key measure of how profitably it invests shareholders' money, stood at 8.7% in the quarter. Goldman is one of few banks that has reliably exceeded 10% -- a level typically demanded by investors -- since the crisis.

Shares of Goldman fell 0.6% to $227.82 in premarket trading. The stock, before Tuesday, had fallen 4% this year after surging more than 30% following the election.

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

(END) Dow Jones Newswires

July 18, 2017 08:12 ET (12:12 GMT)