Goldman Sachs exceeds profit expectations

Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.

Second-quarter net income was $3.44 billion, or $4.93 a share, the New York-based bank said today in a statement. That surpassed the $3.65 per-share average estimate of 22 analysts surveyed by Bloomberg and was 65 percent higher than last year’s second quarter.

Chief Executive Officer Lloyd Blankfein, who helped make Goldman Sachs the highest-paying securities firm by wagering its capital and fueling the bets with borrowed money, is reverting to a business model analysts deemed irretrievably broken after a crisis of confidence in Wall Street raised borrowing costs and led to the collapse of Lehman Brothers Holdings Inc. While rivals have pared risks, Goldman Sachs has increased them.

“Goldman’s got a sweet spot in here, they were the go-to players,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $13.8 billion including Goldman shares, before earnings were released. “For the time being, they’ve got kind of an open playing field all to themselves.”

Last year’s credit freeze led Blankfein to convert the firm to a Federal Reserve-regulated bank, accept government funds and report the first quarterly loss as a public company. This year Goldman Sachs has issued new shares, repaid the U.S. Treasury and reaped higher fees from selling stocks and bonds.

Share Price

Goldman Sachs, the fifth-biggest U.S. bank by assets, climbed 77 percent in New York Stock Exchange trading this year to close yesterday at $149.44. That’s almost triple the low of $52 on Nov. 20. The stock fell to $148.24 in composite trading at 9:47 a.m.

The difference between the yield on Goldman Sachs’s bonds and U.S. Treasuries, known as the spread, has narrowed this year, indicating investors have regained comfort in lending to the company. The spread on $3.2 billion of 5.95 percent senior unsecured notes maturing in 2018 was 268 basis points yesterday, compared with 472 basis points on March 31. A basis point is one-hundredth of a percentage point.

“While markets remain fragile and we recognize the challenges the broader economy faces, our second-quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise,” Blankfein, 54, said in the statement.

Lehman, AIG

The results follow the U.S. bank-rescue effort that funneled about $200 billion from taxpayers to financial firms, including $10 billion to Goldman Sachs, after the bankruptcy of Lehman and near-failure of American International Group Inc.

Revenue in the three months ended June 26 was $13.8 billion, compared with $9.43 billion in the first quarter and $9.42 billion in the second quarter a year earlier. The company’s second quarter ended in May until Goldman Sachs changed its fiscal year last quarter.

The company set aside $6.65 billion for compensation and benefits in the period, or 48 percent of revenue, compared with $4.71 billion in the first quarter. The number of employees fell 1 percent to 29,400 from 29,800 at the end of March. Guy Moszkowski, an analyst at Bank of America Corp. in New York, had estimated that Goldman Sachs would set aside $6.38 billion for compensation in the second quarter.

Book Value

Book value per share rose to $106.41 at the end of June compared with $98.82 at the end of March. Return on equity, a gauge of how effectively the firm invests earnings, was 23 percent in the second quarter compared with 14.3 percent in the first quarter and 20.4 percent in last year’s second quarter, the company said.

Revenue from fixed-income, currencies and commodities, the company’s biggest unit, was a record $6.8 billion in the second quarter, which compared with $6.56 billion in the first quarter and $2.38 billion in last year’s second quarter.

Goldman’s earnings included $1.4 billion of writedowns related to commercial real estate, including $700 million of fixed-income writedowns, $500 million lost on equity investments and $170 million of impairment charges, Chief Financial Officer David Viniar said in an interview with Bloomberg.

The figures also included about $300 million of writedowns related the narrowing of the firm’s own credit spreads during the quarter, Viniar said.

Equities revenue of $3.18 billion in the quarter compared with $2 billion in the first quarter and $2.49 billion in last year’s second quarter.

Value at Risk

Value-at-risk, a statistical measure of how much the firm’s trading operations could lose in a day, rose to an average of $245 million in the quarter from $240 million in the first quarter. In the second quarter of 2008, VaR averaged $184 million.

“Our model really never changed, we’ve said very consistently that our business model remained the same,” Viniar said.

Revenue from equity underwriting jumped to $736 million from $48 million in the first quarter and compared with $616 million a year ago. Debt underwriting revenue was $336 million compared with $248 million in the prior period and $269 million in last year’s second quarter. Financial advisory, which includes fees for takeover advice, fell to $368 million from $527 million in the first quarter and $800 million a year ago.

Principal Investments

Principal investments, which include the value of Goldman Sachs’s stakes in other companies and real estate, generated $811 million of gains after losing $1.41 billion in the first quarter.

Asset-management revenue declined to $922 million from $949 million in the first quarter and compared with $1.16 billion a year earlier. Revenue from securities services, the company’s prime brokerage business that serves hedge funds, rose to $615 million from $503 million in the first quarter.

Investors will receive earnings reports later this week from JPMorgan Chase & Co., Citigroup Inc., and Bank of America Corp. Morgan Stanley, which was the second-biggest U.S. securities firm behind Goldman Sachs before both firms converted to banks last year, said it will report next week.

Source: Bloomberg

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