Goldman beats forecasts, to raise $5 billion

NEW YORK Tue Apr 14, 2009 11:36am EDT

NEW YORK (Reuters) - Goldman Sachs Group Inc posted much higher-than-expected first-quarter profit as it took more trading risk, and said it plans a $5 billion common share sale to help pay back government funds.

The bank also said it lost $1 billion in December 2008, mainly due to trading and investment losses. That month was reported separately and for the first time on Monday as Goldman and Morgan Stanley have both changed their financial years to match calendar years.

Goldman also disclosed that it has set aside $168,901 per employee on average for compensation in the quarter, almost 35 percent more than in the first quarter of the previous fiscal year. The figure is likely to raise eyebrows given concerns expressed by lawmakers and others about excessive compensation on Wall Street.

The results, which were announced a day ahead of schedule, were seen by many analysts as evidence of Goldman's ability to sidestep the worst of the financial crisis. It has posted just one quarterly loss since the middle of 2007, even as competitors have posted several quarterly losses, or gone out of business.

For the quarter ended March 27, Goldman reported net income for common shareholders of $1.66 billion, or $3.39 a share, far exceeding analysts' average forecast of $1.49 a share, according to Reuters Estimates. Revenue rose 13 percent to $9.43 billion.

Some analysts said the results, following Wells Fargo & Co's surprising announcement last Thursday that it expects to report a record first-quarter profit, were a sign the U.S. banking industry is stabilizing.

"It's another sign that the financial sector has gone through the worst," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management.

Goldman's profit came in part because of strong trading results in fixed income, currencies and commodities, where the company posted $6.56 billion of revenue.

The earnings do not compare directly with Goldman's fiscal quarter last year, which ended on February 29, 2008, but in last year's quarter the bank posted net income for common shareholders of $1.47 billion, or $3.23 a share.

Multiple U.S. banks have said that low interest rates and rebounding markets helped them post stronger results in the first two months of the quarter. But JPMorgan Chase Chief Executive Jamie Dimon has said that March was more difficult.

Goldman's shares fell 1.8 percent in after-market trading on Monday.

Its shares had risen 4.7 percent to $130.15 during the main trading session and the bank is one of the few whose shares trade above their accounting value, or book value. Goldman's is $98.82 per share.

Goldman's share price has more than doubled since hitting a record low in November. It is up more than 50 percent this year.

A RARE OPPORTUNITY

But Goldman's report was not all positive. The bank said its net loss for common shareholders was $1.03 billion in December, prompting some to question whether the change in financial years had allowed Goldman to dump much of its bad news into that one-off period and start afresh in the first quarter.

"December was a rare opportunity for both Goldman Sachs and Morgan Stanley," said Brad Hintz, an analyst at Sanford Bernstein. "A single month, without any comparisons that can be made with any other months, so none of us will ever know what goes into the month of December. It's one of those rare opportunities that CFOs dream about." Hintz is a former Lehman Brothers chief financial officer.

The bank said in January that it recorded a roughly $850 million loss from loans extended to units of chemicals company LyondellBasell in December, though the units filed for bankruptcy in January.

Between the December losses and the subsequent profit, Goldman's tangible book value per common share was essentially unchanged from the end of November, at $88.02, the bank said. Tangible common equity is a measure of the bank's net worth, ignoring intangible assets such as goodwill.

A measure of the bank's trading risk, average daily value-at-risk, surged to $240 million in the first quarter of 2009, compared with $157 million for the three months ended February 28, 2008, implying that the bank took more trading risk.

Value-at-risk represents the estimated maximum possible trading loss on 95 percent of the days in the quarter, and it could have risen because the bank did not pare down existing positions even as markets grew riskier.

The increase in risk may raise concerns given the current drive by the U.S. and other governments to reduce risks in the financial sector. Many say that banks had to be bailed out because they took on too much risk in recent years.

Financial markets grew increasingly turbulent after the demise of Lehman Brothers in September 2008. American International Group was rescued by the government soon after. AIG has given $12.9 billion in payments and collateral to Goldman since last fall.

Goldman said it planned to use the proceeds of its share offering plus additional funds to repay the $10 billion of capital it received from the U.S. government under the Troubled Asset Relief Program. The bank said it would pay back the funds after the bank is stress tested by regulators and if the authorities allow it.

Goldman has been vocal about its preference to repay TARP money as soon as possible. In February, Chief Financial Officer David Viniar said the bank is looking to avoid the restrictions that come with TARP.

"We would like to get out from under that," Viniar said.

Later in February, U.S. President Barack Obama signed a law that placed limits on executive compensation for TARP recipients.

Analysts have said that the government may be reluctant to allow banks to repay TARP until all are ready to repay it, to prevent any institutions unwilling or unable to return the capital from being singled out as weak.

Goldman Sachs employees have traditionally been among the highest paid on Wall Street. If Goldman continues to pay employees as much as it did in the first quarter, the average employee will receive more than $675,000 for 2009. In 2007, per capita personal income in the United States was $38,611, according to the United States Census.

The Wall Street Journal, citing people familiar with the matter, reported late Monday that 953 Goldman employees, or nearly 1 in 30, were paid more than $1 million a year last year.

(Reporting by Dan Wilchins; Additional reporting by Elinor Comlay and Juan Lagorio; Editing by Andre Grenon, Gary Hill)