Goldman Sachs 2Q Net Down 11% on Lower Investment Banking Revenue
07/17/2012| 11:05am US/Eastern
--Firm revenue falls 9% from last year and 33% from 1Q
--CEO says market conditions deteriorated in 2Q
--Targets another $500 million in cost savings by year-end
(Updates with new information about cost cutting in the fourth and fifth paragraphs.)
By Liz Moyer and Saabira Chaudhuri
Goldman Sachs Group Inc.'s (>> Goldman Sachs Group, Inc.) second-quarter profit fell 11% as lingering market weakness and lackluster client demand for advisory and trading services took a toll across several main businesses.
Revenue of $6.6 billion fell 9% from last year and 33% from the first quarter. Revenue for the first six months of the year fell 14%, to $16.6 billion, with declines across Goldman's three major business lines.
"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," said Lloyd Blankfein, Goldman's chairman and chief executive, in a statement.
Because of the weak conditions, which have been eroding profitability in recent quarters, Goldman has focused on reining in expenses. It will seek an additional $500 million in cost savings by the end of the year, on top of $1.4 billion in cuts already made, said Chief Financial Officer David Viniar on a conference call Tuesday.
Mr. Viniar said the cuts could affect "a couple of hundred" people. Goldman had 32,300 employees at the end of the second quarter, down 9% from last year.
The results still beat analysts' diminished expectations. Goldman posted second-quarter profit of $962 million, compared with a year-earlier profit of $1.09 billion. Earnings per share of $1.78 beat the $1.16 per share consensus of analysts polled by Thomson Reuters. The estimate had been as low as $1.12 in recent days.
Goldman's traditionally strong trading and investment banking arms have been struggling for the past couple of years as investors have shied away from making big bets in the markets and as corporate chiefs hoard cash instead of make deals. Announced mergers in the second quarter were at the lowest level since the third quarter of 2009, according to Dealogic.
For the quarter, Goldman's total investment banking revenue came in at $1.2 billion, down 17% from a year earlier but up 4% from the first quarter. That includes a 26% decline in advisory revenue and a 37% decline in revenue from equity underwriting, to $239 million, as the market for initial public offerings has been slow since the troubled Facebook Inc. (>> Facebook Inc) offering in May.
Second-quarter revenue from the company's fixed-income division, which encompasses much of the money-making sales and trading businesses that boosted Goldman's earnings and revenue in the past, totaled $2.19 billion, up 37% from a year earlier but down 37% from the first quarter. Bond trading helped lift overall trading, under institutional client services, 11% for the quarter, to $3.9 billion.
Investment management revenue rose 5% for the quarter, to $1.3 billion.
Goldman lost $194 million on its stake in Industrial & Commercial Bank of China Ltd. (IDCBY, 601398.SH, 1398.HK) and another $112 million on its equity stakes in other companies, leading to an 81% drop in second-quarter revenue from its investing and lending business, to $203 million.
The securities firm is facing regulatory headwinds that are crimping its ability to make bets, take a view about the markets, or invest its own money. Trading risk fell in the quarter, to $92 million from $95 million in the first quarter and $101 million one year ago. Lower trading risk reflects caution on the part of clients, Goldman has said in the past.
Part of the Dodd-Frank legislation, the Volcker rule is expected to go into effect soon, and it limits how much of Goldman's own money it can put at risk. Banks, including Goldman, are also preparing to comply with international rules that ramp up the amount of cushion it must have against potential losses. In June, Goldman revealed three executives from its merchant-banking business are retiring in a sign that the powerful Wall Street firm is adjusting to new regulations.
Last month, Moody's Investors Service downgraded Goldman's long-term ratings two levels as part of a broader downgrade of major U.S. banks to reflect declining profitability in an industry being rocked by soft economic growth, tougher regulations and nervous investors.
Also on Tuesday, State Street Corp. (>> State Street Corporation) said it has agreed to acquire Goldman's hedge fund administration business for $550 million in cash.
Hedge fund administration is a relatively mundane behind-the-scenes Wall Street activity, including tax reporting and accounting. Outsourcing frees up time for hedge fund managers to concentrate on their own business. In addition, hedge funds are under pressure to strengthen risk management and compliance.
Shares of Goldman rose 2% to $99.60 in premarket trading. Through Monday's close, the stock is down 25% in the last 12 months.
-Liz Rappaport contributed to this article.
Write to Liz Moyer at email@example.com and Saabira Chaudhuri at firstname.lastname@example.org
Subscribe to WSJ: http://online.wsj.com?mod=djnwires