* Profit $3.70/share vs Wall Street view $2.82
* Revenue from investing and lending jumps
* Return on equity 10.5 pct
* Goldman shares fall 1.7 pct
By Lauren Tara LaCapra
July 16 Goldman Sachs Group Inc said
quarterly profit doubled, boosted by investment gains and a
lower tax rate, but investors fretted that these factors will
not be repeated in future periods, sending the bank's shares
lower on Tuesday.
Goldman's investing and lending segment, which tracks its
investments in private equity deals, publicly traded stocks,
loans and bonds, produced nearly seven times as much revenue in
the second quarter as in the same period last year, much more
than analysts expected.
Investors questioned how much revenue growth the bank can
generate by investing its own capital under new regulations. The
Volcker rule, part of the 2010 Dodd-Frank financial reform law,
limits banks' market wagers with their own money. But the
industry has years to comply with the law, and Goldman believes
most of its investing and lending activities already do.
Goldman's effective tax rate dropped to 27 percent from 32
percent in part because the bank is electing to keep more of its
international income permanently offshore, and because it earned
more money overseas. Chief Financial Officer Harvey Schwartz
told analysts on a conference call that the lower tax rate was
not likely to be repeated.
"It's tough to get too excited about these numbers because
they're potentially unsustainable," said Tom Jalics, senior
research analyst at Key Private Bank, whose clients own bank
The results underscore the difficulties Goldman and its
rivals face in navigating the post-crisis world. With regulators
pressing banks to boost capital levels, many of Goldman's most
profitable businesses are earning less. The bank's return on
equity, a measure of how effectively it wrings profit from
shareholders' money, was just 10.5 percent in the second
quarter, a hair above what it would pay for equity funding.
Overall, Goldman's net income rose to $1.86 billion, or
$3.70 per share, in the quarter, from $927 million, or $1.78 per
share, a year earlier.
Analysts on average had expected $2.82 per share, according
to Thomson Reuters I/B/E/S.
Net revenue rose 30 percent to $8.61 billion.
The biggest contributor to revenue was fixed income,
currency and commodities (FICC) trading, which reflects trading
with clients. Revenue there rose 12 percent to $2.46 billion.
Goldman's results echoed similar trends in the investment
banking units of JPMorgan Chase & Co and Citigroup Inc
, whose fixed-income trading businesses also benefited from
improvements in trading and underwriting revenue in the second
Goldman's stock fell $2.76, or 1.7 percent, to close at
$160.24 on the New York Stock Exchange. The shares are up 64
percent over the past 52 weeks, and are well above Goldman's
tangible book value of $141.62 as of June 30, but down from a
52-week high of $168.18 hit on June 10.
"COMFORTABLE WITH WHERE WE ARE"
On Goldman's conference call with analysts, management
fielded questions about the bank's capital and leverage ratios,
particularly about whether it was in a good position to meet
preliminary U.S. rules for leverage. New proposed regulations
came out earlier this month.
"Our first assessment is we're very comfortable with where
we are," Schwartz said.
He later added that "the only reason I'm not being more
specific about numbers at this stage is the team really hasn't
had the time to go through the kind of diligence that we would
normally want them to."
Goldman's biggest source of revenue growth was the investing
and lending division, where revenue surged to $1.42 billion from
$203 million a year earlier. JMP Securities analyst David Trone
had expected the segment to produce revenue of $850 million.
The segment's results have oscillated wildly since it was
set up in 2009, delivering anywhere from $2.9 billion to $7.5
billion in revenue annually.
Goldman's investment banking revenue increased 29 percent to
$1.55 billion, helped by a 45 percent jump in underwriting
"Improving economic conditions in the U.S. drove client
activity," Chief Executive Lloyd Blankfein said in a statement,
adding that "the operating environment has shown noticeable
signs of improvement."
Bond yields jumped during the quarter, which cut into
clients' willingness to take risk, but those concerns have since
abated a bit, Schwartz said.
"It does feel like people have recalibrated at this stage,"
he said, adding, "Some of this is returning to kind of normal
interest-rate levels. It feels good in some respects."