Goldman earnings top estimates on gains from own investments

By Lauren Tara LaCapra and Tanya Agrawal

REUTERS - Goldman Sachs Group Inc reported a stronger-than-expected 5.5 percent rise in quarterly profit as it earned more from underwriting fees and its own investments.

Net income applicable to common shareholders at the top Wall Street bank rose to $2.19 billion, or $4.29 per share, in the first quarter from $2.07 billion, or $3.92 per share, a year earlier.

Analysts on average had expected earnings before unusual items of $3.88 per share, according to Thomson Reuters I/B/E/S.

Chief Executive Lloyd Blankfein characterized the results as "generally solid".

"Still, the potential for macro-economic instability was felt in the quarter and constrained overall corporate and investor activity," Blankfein said in a statement.

 

Goldman Sachs' shares were up 0.8 percent at $147.65 before the bell on Tuesday.

Total revenue increased 1.4 percent to $10.09 billion from a year earlier, while revenue from trading in fixed income securities, currencies and commodities on behalf of clients dropped 7 percent to $3.22 billion.

Goldman's investment banking revenue increased 36 percent to $1.57 billion.

The Investing and Lending segment, which invests and lends the bank's own money, delivered revenue of $2.07 billion, accounting for 20.5 percent of overall net revenue -- the second-largest contributor behind client trading.

Client trading revenue fell 10 percent to $5.14 billion but still accounted for nearly half of total revenue.

Analysts had forecast that the unpredictable Investing and Lending unit would generate revenue of anywhere from $1 billion to $2.2 billion.

The bank's investing of its own capital has helped it beat analysts' expectations in many quarters, but also led to Goldman's second-ever loss as a public company in the third quarter of 2011.

Total operating expenses were virtually unchanged at $6.72 billion.

Goldman's annualized return-on-equity, a closely watched measure of profitability, rose to 12.4 percent in the first quarter from 12.2 percent in the year-earlier quarter, but was still far below pre-crisis levels of above 30 percent.

The bank's average daily value at risk, which measures the maximum that Goldman could have lost on 95 percent of trading days, was $76 million during the first quarter, down from $95 million a year earlier.

Goldman said its Tier 1 capital ratio slipped to 14.4 percent from 14.7 percent.

The U.S. Federal Reserve told Goldman in March that its annual "stress test" showed that it needed to improve its capital plans. Chief Executive Lloyd Blankfein said then that the bank would resubmit its capital plan with enhancements by the end of the third quarter.

"IMPOSSIBLE TASK"

Goldman, responding to criticism about its transparency, created the Investing and Lending division in 2011 to isolate the money it earns from its own investments and loans from the money it earns from managing money for clients.

But the unit continues to befuddle investors and analysts since it invests in a wide array of assets and there is little disclosure.

"Trying to predict bank earnings down to the penny is an impossible task because they're just so non-transparent," said Bernie Williams, vice president of discretionary money management at USAA Investments, which oversees $55 billion in assets.

Williams, who spoke before Goldman's results were released, said that among big banks "Goldman probably has the widest variance" compared to expectations because it is so heavily weighted in trading and principal investments.

Investing and Lending earnings come mostly from mark-to-market gains on stocks, bonds, loans and other assets. It also includes interest income from loans.

The bank breaks the earnings into four segments -- gains on a large equity stake in the Industrial and Commercial Bank of China <691398.SS>, gains on other equity securities excluding ICBC, gains and interest from debt and loans, and "other."

Changes in the value of equity securities was the biggest factor in the surge in Investing and Lending revenue in the first quarter, posting an increase of 24 percent from the same quarter the year before.

But it's difficult to tell precisely what drove the earnings in Investing and Lending, because Goldman is not required to disclose information about most of its investments and loans.

"Those gains are being discounted more today, because you really don't get a lot of disclosure," said Donald Sauber, an analyst who covers financial stocks at Bank of New York Mellon's wealth management division, which oversees $179 billion.

"A lot of banks have a significant number of line items and don't go through what drove results in any given quarter," said Sauber, who also spoke before Goldman's results were released.

JPMorgan Chase & Co , the biggest U.S. bank, reported a 33 percent rise in first-quarter profit on Friday, but most of its major businesses turned in lackluster performances.

Citigroup reported a 30 percent rise in profit on Monday, helped as the bank made more money from underwriting stock issues and advising companies on mergers.

(Reporting By Lauren Tara LaCapra in New York and Tanya Agrawal in Bangalore; Editing by Supriya Kurane)