Bond Trading Slump Clouds Goldman's Mixed 3Q Report

Goldman Sachs (NYSE:GS) reported flat third-quarter profits on Thursday as the investment bank suffered a 44% plunge in fixed-income revenue amid an industry slowdown in trading activity.

The Wall Street heavyweight countered the trading slowdown by slashing expenses, especially on the compensation side, but its shares still fell almost 3% in response to the mixed results.

Goldman said it earned $1.52 billion, or $2.88 a share, last quarter, compared with a profit of $1.51 billion, or $2.85 a share, a year earlier. Analysts had called for EPS of $2.43.

Revenue slid 20% to $6.72 billion, trailing the Street’s view of $7.36 billion.

"The third quarter's results reflected a period of slow client activity," Goldman CEO Lloyd Blankfein said in a statement. "Still, we saw various signs that our clients are prepared to act on significant transactions and we believe that the firm is well positioned to help our clients accomplish their objectives.”

Goldman’s results were hurt by a 32% slide in revenue to $2.86 billion from the bank’s institutional client services unit. This was driven by a 44% dive in revenue in fixed income, currency and commodities client execution due to lower mortgage, interest rate, credit products and currencies revenue. Only commodities enjoyed stronger revenue.

The division “operated in a challenging environment, which was characterized by economic uncertainty, difficult market-making conditions in certain businesses and lower levels of activity,” the bank said.

Equity revenue slid 18% to $1.62 billion due to the sale of Goldman’s America’s reinsurance business and lower levels of activity and volatility.

Goldman’s investment-banking revenue was flat at $1.17 billion even as financial advisory revenue fell 17% to $423 million due to slower M&A activity. The bank’s underwriting business enjoyed a 13% bump in revenue to $743 million as initial public offering activity increased. Debt underwriting was unchanged.

Goldman helped offset slumping trading revenue by taking an axe to expenses, which tumbled 25% year-over-year to $4.56 billion. Compensation and benefits expenses dropped 35% to $2.38 billion, while non-compensation expenses dipped 9% to $2.17 billion.

The board of Goldman approved raising the bank's dividend to 55 cents per share, up from the current level of 50 cents.

Blankfein offered an optimistic perspective on the fiscal standoff in Washington that shut the government for more than two weeks and threatened a possible default.

“As longer term U.S. budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery,” he said.

Shares of New York-based Goldman retreated 3.05% to $157.30 in premarket trading on Thursday morning, putting them on pace to trim their 2013 rally of 27%.

Rival investment bank Morgan Stanley (NYSE:MS) is slated to report its quarterly results on Friday morning.