New York: Goldman Sachs Group Inc quarterly earnings nearly quadrupled, topping expectations, but its shares fell on disappointment that so much of the profit came from trading gains that might not be sustainable.
The firm, which was already Wall Street’s largest investment bank before the financial crisis and has become even more dominant as some rivals have fallen by the wayside, stayed on pace to hand out more than $20 billion in year-end bonuses.
Citigroup Inc, which also reported results on Thursday, posted a per-share loss as it suffered $8 billion of credit losses. Stellar results by rival JPMorgan Chase & Co on Wednesday may have prompted investors to raise the bar for Goldman, and its shares fell 1.2% in early trading. Through Wednesday, Goldman shares were up more than 300% from lows hit last November.
“Goldman produced great numbers but apparently didn’t live up to those heightened expectations,” said Peter Jankovskis, co-chief investment officer at Oakbrook Investments.
“They’re real earnings, the question is how repeatable are they,” he said. “Trading gains come and go. They’re genuine earnings at the time, but its not like something you rely on quarter to quarter.”
The New York-based firm posted net income in the third quarter for common shareholders of $3.03 billion, or $5.25 a share. That compares with $845 million, or $1.81 per share, in the year-earlier quarter.
Analysts on average had forecast earnings of $4.24 a share, according to Thomson Reuters I/B/E/S.
“They are better than expected but there was talk of them coming in at $6, so that’s why they have sold off a bit after the figures,” said Arifa Sheikh-Usmani, equity trader at Spreadex.
Goldman Sachs chief financial officer Viniar said results lagged behind the second quarter’s record earnings in part because of the summer downturn in the mergers and acquisitions business. He said on a conference call that the calendar for fourth-quarter equity underwriting appeared robust.
Viniar declined to compare Goldman’s performance with that of JPMorgan, saying it was always hard to compare two companies quarter over quarter.
Goldman set aside $5.4 billion for compensation during the quarter, raising the total to $16.8 billion so far this year. It is on pace to stash away more than $20 billion for its year-end bonus pool.
Goldman usually devotes about half of net revenue to compensation. In the third quarter, the proportion was 43%.
The firm has drawn fire from politicians and the public for setting aside so much for bonuses so soon after repaying a $10 billion taxpayer bailout.
Goldman, which has been working on burnishing its image, said it made a $200 million contribution to the Goldman Sachs Foundation, an education charity. That helped raise its non-compensation expenses 2% to $2.23 billion.
Viniar, in the conference call, was bombarded by questions from reporters about the firm’s plans for doling out bonuses. He said Goldman would not make a decision on the matter until the end of the year.
“I would prefer people were focused on the performance of the business,” he said.
Strong Trading Revenue
Net revenue in Fixed Income, Currency and Commodities (FICC) was $5.99 billion in the third quarter, up from $1.59 billion a year earlier. The increase reflects strong performances in credit products and mortgages, which were significantly higher compared to a difficult third quarter of 2008.
Net revenue in equities was up 78% to $2.78 billion, helped by a strong performance in derivatives and shares.
Principal investments posted net revenue of $1.26 billion after a $453 million loss in the year-ago quarter.
Goldman recorded gains in corporate principal investments and its investment in Industrial and Commercial Bank of China Ltd, but posted a loss of $66 million from real estate principal investments.
Net revenue in investment banking and financial advisory fell during the quarter, reflecting the decline in mergers and acquisitions.
Investment banking net revenue was $899 million, down 31% from the third quarter of 2008. Results in financial advisory were $325 million, down 47%.
Net revenue in asset management and securities services was down 29% to $1.45 billion.
Goldman was not hurt as mush as its peers during the financial crisis, in part because it limited its exposure to risky bets on subprime mortgages. But after the demise of Lehman Brothers Holdings Inc in September 2008, Goldman became a bank holding company to erase any questions about its ability to survive.
Rival Morgan Stanley is expected to report quarterly results next Wednesday.