Goldman Sachs Group Inc., the storied Wall Street trading firm, didn't have a good quarter. But Goldman Sachs, the investor, had a great one.
The firm reported a surprise increase in second-quarter profit as big gains on its private portfolio of equity stakes offset steep declines in its core trading businesses.
Goldman reported earnings of $3.95 a share, beating analyst estimates of $3.39 and last year's second-quarter figure of $3.72. Revenue of $7.89 billion fell from $7.93 billion, but beat expectations of $7.52 billion.
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.
Shares of Goldman declined 1.1% to $226.65 in premarket trading Tuesday. The stock has lost 4% this year after surging more than 30% following the election.
Saving the quarter was Goldman's portfolio of private company stakes. The bank reported a 42% increase in revenue from a category it calls "Investing and Lending," which isn't a distinct operating unit but rather encompasses loans and equity investments from various corners of the bank.
The bank said the increase was mainly due to higher valuations for its stakes in private companies. The portfolio includes technology startups such as trading firm Kensho Technologies Inc.
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.
Revenue from trading bonds and other fixed-income products fell 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 firm blamed "a challenging environment characterized by low levels of volatility, low client activity and generally difficult market-making conditions," and it cited weakness in nearly all the major products it sells.
The results will likely amplify criticism that Goldman hasn't responded quickly enough to changing investors preferences and market conditions. A rejiggering of the division's leadership last fall failed to jolt the desk from its malaise, which culminated in having its revenue surpassed in the first quarter by Morgan Stanley, Goldman's rival and historically a weakling in debt trading.
Goldman has seen a stream of departures among rank-and-file fixed-income salespeople and traders in recent months. Continued woes in the division are likely to ramp up pressure for another shake-up.
"Fixed-income trading took a massive blow at Goldman Sachs, far worse than we have seen at other banks," said Octavio Marenzi, chief executive of capital markets management consultancy Opimas.
The story was better in equities, which posted its best quarter in two years. Revenue of $1.89 billion increased 17% from a year ago. Surprisingly, revenue rose in cash equities, the plain-vanilla business of buying and selling stocks, bucking a yearslong decline as electronification has gutted fees and quiet markets have reduced trading.
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 have said 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 reported a 3% decline in revenue from a year ago, with merger fees down 6% and stock and debt underwriting basically flat.
Goldman has leaned hard on Investment banking 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 remains the No. 1 adviser this year and snagged roles on the two largest deals of the second quarter, Amazon.com Inc.'s deal for Whole Foods Market and Becton Dickinson & Co.'s takeover of C.R. Bard Inc.
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.
Goldman's investment-management division, which serves big funds and wealthy individuals, reported a 13% increase in revenue as well as net inflows of $25 billion. Goldman has largely placed its chips on active stock picking, an increasingly tough business as investors have shifted trillions of dollars to strategies that simply mirror the market.
Write to Liz Hoffman at firstname.lastname@example.org
(END) Dow Jones Newswires
July 18, 2017 08:49 ET (12:49 GMT)