Goldman Sachs Reports Big Profit, Beating Forecasts

Goldman Sachs Reports Big Profit, Beating Forecasts
Copyright by Bloomberg News
By GRAHAM BOWLEY
Published: July 14, 2009
http://www.nytimes.com/2009/07/15/business/15goldman.html?_r=1&hp


Comfortably beating analysts’ forecasts, Goldman Sachs earned second-quarter net profits of $3.44 billion, or $4.93 a share, the bank announced on Tuesday.

The results continue a robust turnaround for the firm since it rode out the final tumultuous months of last year with the aid of a federal rescue. They come just one month after it paid back its $10 billion in federal aid.

Goldman’s profit was lifted by record quarterly revenue of $6.8 billion in its fixed income, currency and commodities unit, where mortgage and other credit instruments are traded, the bank said in a statement. This business has performed well since the bank has taken on greater levels of risk since the end of last year.

Its equity underwriting business also generated record net revenue, worth $736 million in the second quarter, it said, as Goldman benefited among other things from a rush by other troubled banks to issue shares and raise their capital levels.

“We are performing well across the board,” said David A. Viniar, chief financial officer, who said the strong performance reflected “blocking and tackling every day” by Goldman’s employees.

The bank, which amid the crisis converted from an investment bank to a more regulated commercial bank structure last fall, said in the first six months of 2009 it had set aside $11.4 billion for compensation and benefits. Analysts said this was up 33 percent from a year earlier and was enough to pay each employee $386,429 for the first half of this year.

Over all, Goldman’s net revenue was $13.76 billion, compared with $9.43 billion in the first quarter.

“These are pretty good results,” said Peter Nerby, an analyst at Moody’s, adding that this was an understatement.

Goldman Sachs’s shares, which had risen almost 10 percent in the last three days on expectations of strong earnings, were trading Tuesday morning at $150.64, up $1.20.

Goldman was humbled along with the rest of Wall Street last year when the financial markets froze.

As a result, it lost money in the final quarter of 2008, a rarity for the bank.

But since then it has rebounded strongly, posting robust profits in the first quarter on the back of trading revenues and again in the latest quarter.

Many analysts are likely to welcome the news as another sign that the financial industry is stabilizing, and the Goldman results will probably set a positive tone for a slew of other bank results expected in the coming week. Other banks like JPMorgan Chase have been emerging as strong players since last year’s financial troubles, and analysts also expect them to record strong results, again partly on the back of robust trading revenues.

But Goldman’s performance in particular is raising questions about how its rapid return to making strong profits will be perceived by lawmakers and taxpayers who helped it with the multibillion-dollar cushion last fall after the nation’s financial industry was shaken to its foundations.

Goldman, along with other banks, also benefited from a government program that allows banks to issue debt cheaply with the backing of the Federal Deposit Insurance Corporation. In addition, it received money from the government’s bailout of the American International Group, being paid 100 cents on the dollar for its $13 billion counterparty exposure to the insurer.

However, while other banks like Bank of America and Citibank have not yet been able to pay back the money they received under the government’s Troubled Asset Relief Program, Goldman Sachs has done so, along with dividends on preferred shares issued to the government.

Goldman’s trading revenue has been helped by the fact that several of its rivals have gone out of business following the credit crisis, a fact that has added to its market share. It has also been able to increase its fees.

Mr. Viniar said that within its trading business, activity in credit products and currencies had been especially robust. Results from Goldman’s interest rate products and commodities business were down from the first quarter, but still strong, he said.

Mr. Nerby said a measure of risk-taking at Goldman, and other banks, known as value at risk, which estimates how much money a firm might lose on a single day, had stayed at a high level in the second quarter after rising sharply in the first quarter.

“They are in a great position to take risks for customers, and these results are evidence of this,” he said.

He said Goldman’s business mix was changing — as mergers and acquisitions revenue slowed, for example, reflecting a slower economy, the trading business was taking over.

In the first quarter, Goldman had announced profits of $1.66 billion, or $3.39 a share, again bolstered by strong revenue in its trading business.

As Goldman has recovered this year, its share price has soared — 77 percent this year. The stock is still well off its record high of $250.70, reached in 2007.