New York, 20 September Two Wall Street investment banks had dramatically different success in weathering market turbulence triggered by a subprime mortgage meltdown, as results at Goldman Sachs Group easily exceeded expectations, while Bear Stearns Cos fell far short.
Third-quarter profit at Goldman, the largest securities firm by market value, soared 79% to $2.85 billion, or $6.13 per share, from $1.59 billion, or $3.26 per share, a year earlier, as bets against mortgages helped boost revenue from fixed-income trading to a record.
Bear Stearns profit plunged to a five-year low, sinking 61% to $171.3 million, or $1.16 per share, from $438 million, or $3.02. Results were hurt by subprime mortgage write-downs, an 88% slide in fixed-income trading revenue and $200 million of costs from the collapse of two of its hedge funds.
Analysts on average expected profit per share of $4.37 at Goldman and $1.78 at Bear Stearns.
“Goldman had a stellar performance, no question about it,” said Mark Batty, an analyst at PNC Wealth Management in Philadelphia, which invests $77 billion. “Bear had a challenging quarter. They have more exposure to the mortgage business, and they suffered for it.”
Wall Street banks this week turned in mixed results after investors stopped buying a wide variety of securities they no longer considered safe, including subprime mortgages and high-yield debt to fund leveraged buyouts.
Results topped forecasts at Lehman Brothers Holdings and fell short at Morgan Stanley. Profit at both fell. Merrill Lynch & Co Inc reports results next month.
Goldman shares closed down $1.97 at $203.53, while those of Bear Stearns fell 18 cents to $115.46.
Bear Stearns’ shares was buffered by comments from the company’s chief financial officer, Sam Molinaro, who said on a conference call: “The worst is largely behind us.”
A seizing up of credit and capital markets and the nation’s housing slowdown helped push the US Federal Reserve today to cut the federal funds rate by half a percentage point to 4.75%, more than many economists had expected.
“People are taking a breath and realizing that it will be a while before banks show sustainable growth,” said Henry Asher, president of the Northstar Group in New York. “The (earnings) numbers are not horrific but it will take some time.”
Diversity helps Goldman
At Goldman, Chief Executive Lloyd Blankfein oversaw a 71% increase in revenue from fixed income, currencies and commodities to $4.89 billion, despite $1.48 billion of losses related to write-downs of non-investment-grade credits.
That was partly offset by a $900 million gain from the sale of power company Horizon Wind Energy LLC.
Investment banking revenue rose 67% to $2.15 billion, helped by higher fees from advising on mergers. Overall net revenue rose 63 percent to $12.33 billion, the second-highest ever.
“It demonstrates how diverse Goldman is both in terms of its product range, as well as its geographic diversity,” said Camilla Petersen, an analyst at Atlantic Equities in London. “Who would have thought they would put out $1.4 billion in advisory fees?”
David Viniar, Goldman’s chief financial officer, said the subprime meltdown is “closer to the bottom” than three months ago. He also said Goldman may have a chance to buy mortgage assets at low, distressed prices.
“In the medium to longer term, there’s still pretty good economic growth,” he said. “That causes us to be optimistic.”
Market turns for Bear Stearns
At Bear Stearns, Chief Executive James Cayne said results suffered from “extremely difficult” securitization markets and high volatility across asset classes.
The company, long a leader in packaging home loans into mortgage-backed bonds, said fixed-income revenue fell to $118 million from $945 million a year earlier. Total net revenue slid 37.5% to $1.33 billion.
“Bear Stearns is a big fixed-income shop and when things got frothy in those markets, they weren’t ready for things to turn,” said Adam Compton, an analyst at RCM Global Investors in San Francisco, which invests $150 billion.
The collapse of two structured credit funds hurt results in the company’s wealth management unit, which posted a $226.5 million pre-tax loss, compared with an $18 million profit a year earlier.
Goldman shares are up 2% this year, while Bear Stearns shares are down 29%. The Amex Securities Broker Dealer Index, which includes both companies, is down 4 %. Reuters