Goldman Net Drops 70% as Merger Advice, Trading Slow (Update2)
By Christine Harper
Sept. 16 (Bloomberg) -- Goldman Sachs Group Inc., the largest of the two remaining independent U.S. securities firms, said third-quarter profit fell a record 70 percent as revenue from advising corporations and trading stocks declined.
Goldman dropped 12 percent in New York after the firm reported net income of $845 million, or $1.81 a share in the three months ended Aug. 29, compared with $2.85 billion, or $6.13, a year earlier.
After setting Wall Street profit records in 2006 and 2007, Chief Executive Officer Lloyd Blankfein is grappling with market convulsions that drove Merrill Lynch & Co. and Bear Stearns Cos. into emergency sales and Lehman Brothers Holdings Inc. into bankruptcy. Shares of New York-based Goldman slumped 12 percent yesterday and its senior notes dropped to a record low on concern no investment bank, even the most profitable, was safe.
``The business is just not happening and therefore Goldman can't take advantage of what doesn't exist,'' Ladenburg Thalmann & Co. analyst Richard Bove said in a Bloomberg Television interview. ``This is still 50 percent to 60 percent below what the company had been earning a couple years ago. The quarter is really terrible in many respects.''
The shares declined $15.59 to $119.91 in composite trading on the New York Stock Exchange. The profit drop was the steepest in Goldman's nine years as a public company.
Record Decline
While Goldman has suffered a fraction of the writedowns on fixed-income assets that New York-based competitors Citigroup Inc. and Merrill have taken, its shares have dropped 34 percent this year as markets tumbled and fees from securities underwriting and providing merger advice dried up.
``We remain well-positioned to meet the needs of our clients and identify and act on the right market opportunities,'' Blankfein said in a statement.
Analysts surveyed by Bloomberg estimated earnings of $1.71 a share. Goldman has beaten analysts' estimates for 13 straight quarters.
Return on equity, a measure of how effectively the firm reinvests earnings, fell to 7.7 percent from 20.4 percent in the second quarter.
Revenue dropped 51 percent from a year ago to $6.04 billion. Fixed-income, currencies and commodities, the company's biggest source of revenue, generated $1.6 billion, down 67 percent. The firm took $275 million in writedowns on leveraged loans and related hedges, $500 million on residential mortgages and securities and $325 million on commercial mortgages and securities.
`Robust' Liquidity
Chief Financial Officer David Viniar said on a conference call with reporters that the firm had reduced its leveraged loan positions to about $8 billion. He said access to market liquidity remains ``robust.''
Equities trading revenue fell 50 percent to $1.56 billion and revenue from investment banking, which includes providing merger advice and underwriting stock and bond sales, dropped 40 percent to $1.29 billion.
The equities division was affected by a drop in stock prices, less trading by clients and ``very weak results'' from the firm's proprietary traders, Goldman said. Derivative revenue from equities was also lower.
The principal investments group, which includes the company's stake in Industrial & Commercial Bank of China Ltd., produced a $453 million loss, compared with a gain of $211 million a year earlier. ICBC dropped 17 percent in Hong Kong trading during Goldman's fiscal third quarter. Goldman owns about 5 percent of the company, although about two-thirds of its holding is on behalf of clients.
Asset Management
Asset-management revenue fell 6 percent from a year ago to $1.13 billion, partly because the third quarter in 2008 had one fewer week than in 2007, the company said. Assets under management declined $32 billion, of which $25 billion was because the market fell and $7 billion was because clients pulled their money out of Goldman's funds.
Goldman's Tier 1 ratio was 11.6 percent, up from 10.8 percent in the second quarter. So-called Level 3 assets, including those to which the firm says it has no economic exposure, totaled $68 billion, or 6 percent of total assets. Level 3 assets are the ones that are hardest to value.
Lehman last week reported the biggest loss in its 158-year history, and its share price plunged 74 percent as management led by CEO Richard Fuld raced to find a buyer. Negotiations over the weekend at the New York Federal Reserve's downtown Manhattan headquarters failed to assuage the concerns of potential buyers and the company filed for bankruptcy protection yesterday.
Merrill Takeover
Lehman's predicament made it clear to Merrill CEO John Thain that his firm's survival could be in jeopardy if he didn't find a buyer soon. Merrill, expected to post its fifth-straight quarterly deficit next month, agreed to be acquired by Charlotte, North Carolina-based Bank of America Corp. in an all- stock deal valued at about $50 billion.
Merrill considered selling a minority stake to Goldman before agreeing to the Bank of America deal, the Wall Street Journal reported today, citing people familiar with the matter.
American International Group Inc., the biggest U.S. insurer by assets, had its ratings cut yesterday, raising speculation the company needs to find more cash to post collateral. AIG is trying to arrange loans from Goldman and JPMorgan Chase & Co., according to two people familiar with the situation.
``Our exposure to AIG is not material,'' Lucas van Praag, a spokesman at Goldman in New York, said in an interview. ``We have always managed our exposure to single names extremely conservatively. That was the case with Bear and Lehman.''
Viniar declined to comment on possible financial transactions between Goldman and AIG.
Morgan Stanley
Morgan Stanley, the second-biggest U.S. securities firm after Goldman, is scheduled to report third-quarter earnings tomorrow. The firm may post a 44 percent drop in net income to $866 million, according to the average estimate of 10 analysts surveyed by Bloomberg.
Goldman and Morgan Stanley need to show investors that they've learned from the errors made by Merrill, Lehman and Bear Stearns by selling off some of their holdings of complex, hard- to-trade assets.
``I would hope they have taken the last few months as an adequate caution to clarify their positions and reduce some of their exposures,'' said John Gutfreund, president of Gutfreund & Co. and the former CEO of Salomon Brothers, in a Bloomberg Television interview yesterday.
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
Last Updated: September 16, 2008 09:35 EDT |
