Goldman Sachs Group Inc's quarterly profit fell 12 percent as investment income plunged, reflecting the pressure the bank faces as demand for its services remains tepid and regulators clamp down on bank risk-taking.
In an environment the investment bank characterized as "tough," Goldman said it was embarking on a new round of cost-cutting, which will include laying off some senior employees.
Goldman has long been known for making savvy bets on markets, and last decade it earned billions of dollars from those trades. But in the second quarter it lost $194 million on its investment in Industrial and Commercial Bank of China Ltd (ICBC) and $112 million on its investment in other stocks, the bank reported on Tuesday. Overall revenue in the group that invests the bank's money plunged 81 percent.
In the current environment, with the European debt crisis still not fully resolved, and China's growth slowing, Goldman has scaled back its risk-taking, even before new U.S. regulations take effect limiting its investments.
Goldman's average daily value at risk, a measure of the most money it could lose on 95 percent of trading days, was $92 million during the second quarter, the lowest it has been in nearly six years.
Goldman announced new cost cuts, but it was already reducing expenditures. The bank previously planned to cut annual costs by $1.4 billion, a figure it has now increased to $1.9 billion. Operating expenses fell 8 percent in the second quarter.
But the bank's net revenue dropped 9 percent in the quarter, faster than the bank cut costs. Goldman's return on equity - a measure of how effective it is at wringing profit from its balance sheet - was just 5.4 percent. Before the financial crisis, its return on equity was routinely above 30 percent.
"We are not going to have an acceptable return on equity in this environment," Goldman's chief financial officer, David Viniar, said on a conference call with investors.
The results were not strong, but did beat analysts' average forecasts, lifting the bank's shares 0.2 percent to $97.86 in afternoon trading.
As traditional investment banking businesses struggle to grow, Goldman is looking at more conservative ways to earn money, such as gathering more deposits and making more loans. This traditional commercial banking business would have been anathema to Goldman before the crisis.
A report in The Wall Street Journal said Goldman is building it private bank, and hopes to grow its loan portfolio from $12 billion to $100 billion.
Goldman cut 100 employees from its payroll last quarter, and has cut staff in five of the past six quarters. The bank had 32,300 employees at the end of the second quarter, 10 percent fewer than it had at the end of 2010.
The bank said it plans to cut senior positions, but it still plans to hire junior employees through channels such as regular campus recruiting, meaning overall headcount may increase by the end of the year, Viniar said.
INVESTMENT BANKING REVENUE DOWN
The bank is betting less of its own money in markets, and many customers are wary, too. Fewer companies have been buying rivals or selling themselves, and some have been reluctant to issue stock, pushing Goldman's overall investment banking revenue down 17 percent in the latest quarter. Equities trading revenue, including commissions, fees, and other services, fell 12 percent.
One of the main sources of uncertainty in markets now is Europe. Uncertainty over the debt crisis and the path of U.S. fiscal policy are holding back any recovery in the United States, Federal Reserve Chairman Ben Bernanke said on Tuesday.
John Dorfman, chairman of Boston-based Thunderstorm Capital, which owns Goldman shares for some clients, said, "Goldman is clearly going through a tough time."
The bank's shares are trading at about 70 percent of book value, or accounting value, of $137. By historical standards, anything below book value is cheap, Dorfman said, adding that investors willing to hold onto the stock for three to five years could be rewarded.
Bright spots in Goldman's results included a 37 percent increase in fixed income, currency and commodity trading revenue. And the investment banking backlog rose from the first quarter, suggesting that underwriting and merger advisory revenue may soon climb.
Another bright spot: The bank performed well compared with some of its rivals. Goldman's 12 percent decline in equities trading revenue was not as bad as JPMorgan Chase & Co's 29 percent drop, and its 37 percent gain in FICC trading compared with declines at JPMorgan and Citigroup Inc. Its decline in investment banking revenue was less steep than at JPMorgan and Citi.
Goldman's chief Wall Street rival, Morgan Stanley, reports quarterly results on Thursday, while Bank of America Corp reports on Wednesday.
Overall, Goldman earned $927 million, or $1.78 per share, in the second quarter, down 12 percent from $1.052 billion, or $1.85 per share, a year earlier. Revenue fell to $6.63 billion from $7.28 billion.
Analysts' average earnings forecast was $1.16 per share, according to Thomson Reuters I/B/E/S.
Goldman's earnings per share easily beat Wall Street expectations, in part because the bank spent $1.5 billion buying back 14.3 million of its shares during the quarter.
Those buybacks may have helped Goldman's shares rise about 8 percent this year, outperforming Morgan Stanley, whose shares are up about 6 percent. (Reporting by Lauren Tara LaCapra; editing by John Wallace)