Goldman Earnings Fall by Half, Yet Beat Views

By Joseph A. Giannone

NEW YORK (Reuters) - Goldman Sachs Group's (GS.N) first-quarter earnings fell by half after recording more than $2.5 billion of losses on loans and other assets, yet resilient trading helped the bank exceed an anxious market's sharply lower expectations.

Wall Street's biggest investment bank by profits and market value on Tuesday said net income fell to $1.51 billion, or $3.23 a share, in the quarter ended Feb. 29, from $3.20 billion, or $6.67, in the year-earlier period. Quarterly revenue fell 35 percent to $8.34 billion.

Turbulent markets, though, generated more revenue than expected from Goldman's mammoth trading business. Corporate bonds and mortgages were weaker, but trading in currencies, interest rates and commodities were at or near record levels.

The results beat analysts' average forecast of $2.57 a share on $7.3 billion of revenue, a bar lowered dramatically in recent weeks. Shares of Goldman surged 9.2 percent to $164.91 in morning trade, recovering ground lost during Monday's market panic and helping lift the entire banking sector.

"Goldman once again shines in difficult times. Times like these do separate the star performers," said Michael Holland, founder of Holland & Co, a money manager overseeing about $4 billion. "This was a stellar report."

Banks and brokers have been slammed for more than a year, as the worst U.S. housing market in decades and a breakdown in debt markets led to some $200 billion of losses around the globe. Yet markets only grew more grim this month.

Listed mortgage investment firm Carlyle Capital Corp last week collapsed, triggering a new wave of worries about the outlook for brokers. Those fears ultimately felled Bear Stearns Cos BSC.N, an 85-year-old firm whose exposure to mortgages prompted an exodus of customers and a run on its cash.

What had been the fifth-largest investment bank was forced to seek a U.S. government bailout and to accept a $2-a-share takeover offer from JPMorgan Chase & Co (JPM.N).

Yet Goldman once again managed to beat expectations. Chief Financial David Viniar stressed that Goldman's cash position has never been stronger and forecast an increase in headcount this year. Still, he offered cautious views about the markets,

"Will it ever get better? Yes. 'When' is a harder question to answer," Viniar told reporters. "I don't know. I know we're getting closer to the bottom, but it's hard to know when things will get turned around."

The bank's trading and principal investments revenue fell by nearly half to $5.12 billion from last year, and down by 26 percent from the fourth quarter, reflecting the continued turmoil in financial markets this year.

Revenue from fixed income trading did fall, but only by 5 percent. Record currencies and interest rate product trading, as well as very strong commodities results, offset weakness in corporate and mortgage bonds.

Goldman also recorded about $1 billion of net losses on residential mortgage loans and securities, as well as net losses of $1 billion on leveraged loans. Before hedges, those write-downs were $1.4 billion.

Turmoil during the quarter also resulted in a net $532 million loss in Goldman's portfolio of direct investments, as its stake in Industrial and Commercial Bank of China Ltd (601398.SS) and other corporate investments fell in value.

Meanwhile investment banking revenue fell by a third to $1.17 billion, reflecting a slump in debt underwriting and decline in stock offerings. Goldman said its investment banking transaction backlog decreased for the second straight quarter.