Goldman Posts Surprise Rise in Earnings--2nd Update

By Liz Hoffman and Peter Rudegeair Features Dow Jones Newswires

Goldman Sachs Group Inc. said its third-quarter profit rose 2%, beating analyst expectations despite a slowdown in its core business of trading.

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The Wall Street firm reported earnings of $2.13 billion, or $5.02 a share. Revenue of $8.33 billion increased 2% from $8.17 billion a year ago and surpassed analyst expectations of $7.54 billion.

Shares rose 1% to $244.75 in premarket trading on the better-than-expected results.

Analysts had expected earnings of $4.17 a share, down from $4.88 a year ago. Goldman was the only big U.S. bank analysts thought would make less money than it did a year ago, largely because it lacks the big lending and consumer businesses that have buoyed larger rivals this earnings season.

Goldman's return on equity, a key measure of how profitably it invests shareholders' money, stood at 10.9% in the quarter.

Last month, Goldman laid out a plan to revive its core trading arm and add $4 billion of revenue in other business, in large part by focusing on lending. These new forays in lending, while growing, are still too small to make much of an impact in its quarterly earnings. The firm, run by Chief Executive Lloyd Blankfein, still makes most of its money arranging big, complex trades and deals for corporate and institutional clients.

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Demand for those services has been slowing. Some companies have delayed deals, awaiting signs from Washington on tax and regulatory reform. Meanwhile, hedge funds and other clients have been less active in unusually calm markets.

Goldman reported a 17% decrease in trading revenues, compared with a 21% decline at J.P. Morgan, a 11% decline at Citigroup and a 15% at Bank of America Corp. Compared with those firms, Goldman is more heavily weighted toward hedge funds and other broker-dealers, which have been less active.

Revenue from trading bonds and other fixed-income products fell 26% to $1.45 billion, partly because of a weaker performance in commodities. That business got off to its worst start in Mr. Blankfein's 11-year tenure as CEO, down 21% over the first half of the year.

"We are not satisfied with our recent performance in [fixed-income]," Harvey Schwartz, Goldman's co-chief operating officer, told investors last month. "We are intensely focused on it. We know you are, as well."

The bank's stock traders posted a 7% decline in revenue to $1.67 billion thanks in part to weaker performance in equity derivatives. Goldman has been upgrading its technology to win clients that gravitated to Morgan Stanley and other rivals in search of better trade execution.

Investment-banking, the business of arranging mergers and helping companies raise money, reported a 17% jump in revenue from a year ago. Goldman has leaned hard on that unit in recent years, which has been dominant in a historic merger and acquisition boom.

But four years into the surge, deal activity is slowing, especially the big marquee merger deals that carry tens of millions of dollars in fees. Some companies have been postponing deals as they wait to see if the Trump administration can deliver promised tax reform.

Goldman's investing and lending revenue rose 35% to $1.88 billion in the third quarter, the most in over three years. It got a boost from higher values for its private-equity investments as well as higher interest income from its portfolio of debt securities.

Within lending, Goldman's approach has been to stick to areas where it can use technology to find customers cheaply, or partnerships with financial-services firms that have large client bases of their own. It is focusing on underbanked niches, and those with wide interest margins that justify Goldman's own cost of funding. That is higher than that of its huge commercial-banking rivals.

Goldman's online consumer-loan business, Marcus, which launched last year, is on pace to originate $2 billion in loans this year.

A new partnership with Fidelity Investments will allow Goldman to lend against stocks and bonds in millions of U.S. brokerage accounts. Last week, Goldman announced it was buying a Los Angeles firm that extends loans to house-flippers.

Lending is a steadier business that will become more attractive as interest rates rise. Still, Goldman has little history with consumer credit and is wading into new debt markets at a time when many analysts are predicting a deterioration in the market and a rise in delinquencies.

Goldman's asset-management unit, which includes its wealthy private bank, reported a 3% increase in revenue and set a record for assets under supervision of $1.46 trillion.

Write to Liz Hoffman at liz.hoffman@wsj.com and Peter Rudegeair at Peter.Rudegeair@wsj.com

(END) Dow Jones Newswires

October 17, 2017 08:40 ET (12:40 GMT)