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MAKE MONEY BLOG$~April through June was not a great period for companies trying to make money in the financial markets
. Volumes were down sharply, stocks sold off and a general malaise gripped the industry as economic data in the U.S. and around the world turned sour.
Goldman Sachs was not spared by the slowdown, as net earnings fell 11.5% from a year ago to $962 million and earnings per share were off 4% to $1.78. The EPS figure was well above the $1.18 consensus though. At the open, shares of Goldman were up 2.2% to $99.85, while rival Morgan Stanley, due to report Thursday, gained 0.8% to $14.36.
The pre-market gains came despite revenue that dropped 9% from the prior year and 33% from the first quarter – when stocks ripped higher and bolstered capital markets businesses – to $6.6 billion. Nomura analyst Glenn Schorr found positives in the quarter, including growth in the fixed income, commodities and currencies (FICC) business and growth in book value, but warns that “[Goldman] can’t thrive on $6.6 billion in revenue.” The long story short, he continues, is that investors “can’t expect too much when markets fall so much.”
Goldman Chairman and Chief Executive Lloyd Blankfein gave a nod to the tough environment in his remarks from the earnings release. “During the second quarter, market conditions deteriorated and activity levels for both corporate and investing clients were lower given continued instability in Europe and concerns about global growth,” he said.
Investment banking revenue fell 17% from a year ago as deal activity dried up somewhat in the second quarter alongside a closed-off IPO market on the heels of Facebook’s mid-May offering, though the unit’s debt capital markets business was a bit stronger than expected. The firm’s institutional client services business grew revenue 11% from a year ago, but had a 32% from the first quarter, while investment management revenue climbed 5% from 2011.
Expenses were down 8% from Q2 2011, and 23% below first-quarter levels. Goldman said it set aside $2.9 billion for compensation and benefits in the quarter, down 9% from a year ago and accounting for 44% of revenue.
With equity and debt markets facing down the ongoing turmoil in Europe, slower growth in emerging markets and the challenges of a tepid U.S. recovery, Goldman is not exactly sitting on its heels. The Wall Street Journalreports Tuesday that the firm is trying to beef up its private bank, which lends to wealthy clients and corporations. Investing and lending generated just $203 million in revenue in Q2, and the firm’s goal of $100 billion in loans reflects Blankfein’s view that expanding the banking business is a “no-brainer,” as he told the Journal.
Second-quarter earnings season has offered some supporting evidence for why Goldman might want to increase its traditional banking functions. JPMorgan Chase, Wells Fargo and Citigroup have all beaten consensus estimates, and touted stronger fundamentals in their lending operations thanks, particularly in Wells’ case, to a healing U.S. housing market.
source: forbes.com
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