Correction to the Goldman Sachs Earnings Story

By Liz HoffmanFeaturesDow Jones Newswires

Goldman Sachs Group Inc.'s first-quarter trading results fell well short of those notched by rivals, an uncharacteristic stumble for the Wall Street powerhouse that caused its earnings to miss analyst estimates.

The firm reported a profit of $2.26 billion, or $5.15 a share. That was higher than the $2.68 a share it reported a year ago -- which was Goldman's worst first quarter in 12 years -- but below the $5.31 a share expected by Wall Street analysts.

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Revenue grew 27% to $8.03 billion, again short of expectations for $8.45 billion.

Goldman shares fell 4% in morning trading, hitting their lowest level since late November. It is the worst-performing stock among big banks this year as investors' exuberance about the Trump administration's agenda has worn off.

Many investors expected a strong quarter from Goldman after rivals J.P. Morgan Chase & Co. and Citigroup Inc. last week reported big double-digit increases in their trading revenue, with fixed-income, currencies and commodities leading the way.

Bank of America Corp. joined the wave Tuesday, reporting trading revenue that was up 23%, driven by a 29% increase in fixed-income revenue.

Higher interest rates, raised twice by the Federal Reserve in recent months, bode well for fixed-income revenue as investors buy products to protect themselves from future increases and bet on diverging rates.

But Goldman, which often lives or dies by its core trading business, didn't get the same boost. Trading revenue fell 2.4% from a year earlier, with equities down 6% and fixed-income essentially flat.

"Hard to put lipstick on these results," UBS Group AG analysts wrote in a note to clients Tuesday.

The majority of questions on Goldman's earnings call -- the first for the firm's new finance chief R. Martin Chavez -- concerned the trading results. "Ultimately we didn't navigate the market well," Mr. Chavez said. "But no quarter defines the franchise. There are always things we can do better."

He blamed the trading performance on calm markets, which makes it harder for trading clients to find bargains and rebalance their portfolios. Mr. Chavez added that currencies, commodities and corporate bonds were weaker. The latter was a bright spot at Bank of America, which beat Goldman on fixed-income trading by more than $1 billion in revenue.

The first quarter is typically the strongest for trading desks, as investors return from the holidays and reposition their portfolios for the new year.

Last year, it was a terrible one, but equally rough across Wall Street. Now, a slow start relative to peers puts Goldman on its heels.

It is also likely to raise questions about whether the firm has the right mix of trading clients. Goldman's traditional strength in peddling complex, bespoke trading products to hedge funds became a liability in recent years, as these clients struggled with poor returns and the industry showed a preference for simpler widgets.

The firm has pushed over the past year or so to do more trading business with corporations and asset managers. Mr. Chavez said Tuesday that the firm's efforts in that area was still under way.

Goldman's other businesses performed better. Revenue in Goldman's investment-banking division, which helps companies merge and raise capital, rose 16% to $1.7 billion.

Merger fees fell 1.9% to $756 million year-over-year, and the bank said its pipeline of future deals shrunk. But stronger underwriting more than made up the difference, with a 70% increase in stock offerings leading the way.

"The operating environment was mixed, with client activity challenged in certain market-making businesses and a more attractive backdrop for underwriting in our investment banking franchise," Chief Executive Lloyd Blankfein said in a statement.

Goldman made $1.46 billion on its own portfolio of equity stakes and loans, a hodgepodge segment dubbed investing-and-lending. Revenue in that division tends to swing wildly as positions are marked; in the first quarter of 2016, it posted $87 million, its worst showing ever.

Investment-management revenue, which manages the money of wealthy individuals, pension funds and others, rose 12% year-over-year to $1.5 billion, while assets under management fell slightly.

Goldman's return on equity, a closely watched measure of profitability, stood at 11.4% in the quarter. The firm has been regularly exceeding 10%, the minimum return bank investors typically demand. And Goldman increased its quarterly dividend to 75 cents a share, a 10-cent increase -- its first such increase in two years.

Goldman got a $475 million boost to earnings from a new accounting rule related to the treatment of stock-based compensation paid to employees. It had earlier said it expected an increase of up to $450 million.

Write to Liz Hoffman at

Corrections & Amplifications

This article was corrected at 12:21 p.m. ET because the original version misstated the name of Goldman's chief financial officer. It is R. Martin Chavez, not E. Martin Chavez.

"Goldman Misses Big on Trading, Trails Rivals Badly -- 6th Update" at 11:12 a.m. ET misstated the name of Goldman's chief financial officer. It is R. Martin Chavez, not E. Martin Chavez.

(END) Dow Jones Newswires

April 18, 2017 12:34 ET (16:34 GMT)