Goldman earnings top estimates on investment gains

By Lauren Tara LaCapra and Tanya Agrawal

REUTERS - Goldman Sachs Group Inc reported higher quarterly earnings on Tuesday but said revenue from client trading fell 10 percent, raising questions about the health of its biggest money maker.

Trading has long been the biggest business for the Wall Street bank, accounting for nearly 60 percent of its revenue over the past four years. But as market volumes have declined since 2009 and competitors have gained strength, Goldman's trading business has lost some of its luster.

First-quarter profit rose 5.5 percent as other businesses made up for the trading declines. Goldman's own investments and investment banking revenue climbed. Yet each of those businesses are less than half the size of the trading franchise.

 

Overall, Goldman reported just a 1 percent increase in revenue, which David Trone, an analyst with JMP Securities, said indicated a "lack of momentum." The bank's shares were down 2.4 percent to $142.96 in morning trading.

At one time Goldman reported its own trading profits and client trading profits together in one business line. But it separated the two items in 2011 after investors and shareholders complained that its earnings were too opaque. The bank now has an earnings segment called "Investing and Lending" that shows how much revenue Goldman receives from mark-ups on a wide range of investments - from stocks and bonds to mines and metal warehouses - as well as interest payments on loans.

For the first quarter, Goldman reported $2.1 billion of revenue from Investing and Lending, an 8 percent rise from a year earlier and the second-highest total since it began separating out that earnings category. Most of the increase came from gains in private-equity holdings, the bank said.

Goldman's client trading business reported declines across the board. Bond trading revenue - historically one of the most lucrative businesses for the bank - dropped 7 percent. Equities trading revenue fell 15 percent.

Overall first-quarter profit rose thanks to both the Investing and Lending gains and sharp increases in stock and bond underwriting fees. Net income applicable to common shareholders rose to $2.19 billion, or $4.29 per share, from $2.07 billion, or $3.92 per share, a year earlier.

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

"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.

But among big banks, "Goldman probably has the widest variance" compared to expectations, he said, because Goldman is so heavily weighted in trading and principal investments.

GAINS FROM EQUITIES

Total first-quarter revenue increased 1.4 percent to $10.09 billion, 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.

Total operating expenses were little changed at $6.72 billion.

Goldman's annualized return-on-equity, a closely watched measure of profitability, rose to 12.4 percent from 12.2 percent a year earlier 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 the bank needed to improve its capital plans. At that time, Chief Executive Lloyd Blankfein said Goldman would resubmit its capital plan with enhancements by the end of the third quarter.

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

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

The bank breaks Investing and Lending 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 24 percent rise in the segment's revenue in the first quarter.

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 and John Wallace)