Goldman Sachs Profit More Than Doubles
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By JENNY ANDERSON
The New York Times
June 13, 2006
Goldman Sachs reported today that its second-quarter earnings more than doubled from a year earlier, fueled by strong results in each of its divisions.
Like Lehman Brothers a day earlier, when it too reported strong earnings, Goldman failed to impress Wall Street with its good results and its stock fell. The investment firm reported its second-best quarter ever but its stock suffered as a result of concerns that recent market weakness would continue and from a seasonal summer slowdown in brokerage activity.
Goldman reported net income of $2.31 billion, or $4.78 a share, significantly higher than the $4.28 a share expected by a survey of analysts. Profit fell 7 percent from the firm's record first quarter, but they soared 167 percent over the year-earlier quarter, when Goldman earned $865 million, or $1.71 a share.
Goldman said it doubled the amount of risk it takes in trading during the quarter.
Revenue totaled $10.1 billion, 2 percent less than the first quarter but more than double the $4.81 billion in revenue a year earlier.
Investment banking, equities and asset management each reported its second-best quarter ever, while the largest division, fixed income, currencies and commodities, which trades a variety of credit products, reported record quarterly profit.
Around 3 p.m., Goldman's shares were trading down $6.20, or 4.3 percent, to $138.80, near its low for the day on the New York Stock Exchange. On Monday, Lehman Brothers reported profit that was 47 percent higher than the previous year and its stock dropped more than $5.
"This is market specific," said Lauren Smith, an analyst at Keefe Bruyette & Woods, a boutique that focuses on financial service firms. "There was nothing Lehman specific yesterday and nothing Goldman specific today. We've had difficult markets and they seem to be not turning."
Investment banking revenue increased 87 percent from a year earlier, to $1.5 billion, fueled by a sequential and year-on-year rise in overall underwriting and stock underwriting and a 58 percent increase in merger and acquisition revenue over the second quarter of 2005.
The fixed-income division, the company's biggest unit, reported revenue of $4.3 billion, up 15 percent from the first quarter and 184 percent over the second quarter of 2005. The group's results were helped by the $700 million sale of a power plant to a General Electric unit.
David A. Viniar, Goldman's chief financial officer, said all of the divisions within fixed income, including currencies, commodities, credit products and mortgages, performed as well as or better than they did in the first quarter.
The equities division, which handles the trading of stocks and stock-related products, made $2.4 billion, down 4 percent from the first quarter but up 113 percent from a year earlier.
The business of servicing hedge funds also reported strong growth, up 34 percent sequentially and year on year and totaling $656 million for the quarter. Over all, the asset management and securities services division recorded $1.6 billion in revenue, down 19 percent from the first quarter but up 37 percent from a year earlier.
Goldman's value-at-risk, its estimate of what it can lose in a trading day, rose to $112 million from $60 million a year earlier and $92 million in the first quarter.
Ms. Smith said such a trend was not surprising. "Goldman is notorious for and committed to trading for their clients in good and bad markets, as well as trading using capital proprietarily."
Mr. Viniar predicted more of the same.
"When we see opportunities, we take risks," he said. "Over the course of Goldman Sachs's history it will get higher as the firm grows."
Like Lehman, Goldman has a positive view on global economic growth but believes weak equity markets, if they persist, will translate to waning corporate confidence and less activity.
Unlike the fixed-income markets, in which the investment firms appear to be able to make money regardless of the direction of interest rates, Mr. Viniar said falling equity markets affect activity levels as well as economic growth. "The direction of equity markets does matter," he said.
Some investors in financial services stocks had a bleaker outlook. "It's all about the psychology and the psychology is very negative," said Michael Holland, a money manager who focuses on the financial services industry.
How to manage turbulence in the markets will be one of the main challenges facing Lloyd C. Blankfein, who was named on June 2 to succeed Henry M. Paulson Jr. as chairman and chief executive. President Bush nominated Mr. Paulson to succeed John W. Snow as Treasury secretary on May 30. Mr. Blankfein, who hails from the commodities side of the business, will take over if the Senate confirms Mr. Paulson's nomination, which is widely expected. |
