Goldman Sachs Group Inc said quarterly earnings tumbled 82 percent, coming in well short of expectations, as trading and underwriting revenue slumped, raising questions about how well Wall Street's preeminent bank can navigate a shifting industry landscape.
Goldman shares were down 2.3 percent in early trading to $142.31. The bank's results weighed on Wall Street stocks, which opened lower.
We've grown accustomed to Goldman bucking the trends in (investment banking), but this quarter it seems like maybe they're more susceptible to broader industry issues, said Walter Todd, portfolio manager with Greenwood Capital Associates. Maybe Superman is turning into Clark Kent.
Second-quarter net income was hurt by several one-time charges, including a $550 million settlement of civil fraud charges brought by the Securities and Exchange Commission and a $600 million expense related to a UK tax on bank executive bonuses.
But even stripping out those costs, Goldman's return on equity, a measure of the bank's ability to squeeze profits out of shareholders' money, was just 9.5 percent. Over the prior four quarters, the average was close to 25 percent.
Chief Financial Officer David Viniar said on a conference call with reporters that financial regulatory reform represents the most sweeping change in the industry in decades.
The bank said client activity fell in the second quarter, particularly in May and June. It blamed worry about global growth rather than client concerns about the SEC civil fraud charges. The bank also evidently took less trading risk during the quarter.
Excluding the cost of the SEC settlement, Goldman reported earnings per share of $1.72, compared with the average Wall Street forecast of $2.08, according to Thomson Reuters
Earnings applicable to common shareholders fell to $453 million, or 78 cents a share, from $2.7 billion, or $4.93 a share, a year earlier.
Revenue fell to $8.84 billion from $13.76 billion.
The SEC civil fraud charges stemmed from Goldman's marketing and packaging of the Abacus collateralized debt obligation. The bank agreed to settle the case last Thursday.
TRADING, UNDERWRITING REVENUE
Fixed income trading revenue, which powered the bank's rebound from the financial crisis, fell to $4.4 billion from $6.8 billion a year earlier.
Investment banking revenue declined to $917 million from $1.4 billion. Although merger advisory revenue rose 28 percent to $472 million, debt and equity underwriting revenue fell 58 percent to $445 million.
Equity trading revenue fell 62 percent to $1.2 billion.
By one measure, the bank took less trading risk during the quarter. Its value-at-risk, or the maximum possible losses on 95 percent of the trading days during the quarter, fell to $136 million from $245 million in the same quarter of 2009. The second quarter 2010 figure was the lowest in three years.
As Goldman's earnings swung lower, so did its set-aside for compensation. The firm slashed its compensation and benefits expense to $3.8 billion from $6.6 billion a year ago.
(Reporting by Steve Eder; editing by John Wallace)