Goldman Earnings Fall by Half, Yet Beat Views

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.

“It’s an uncertain market. There’s lower equity prices, a lot of volatility,” Viniar said. “Until there is greater certainty and people start feeling better about the markets, I don’t see that (banking activity) picking up dramatically.”

Some analysts questioned whether Goldman was conservative enough. Merrill Lynch noted Goldman did not report commercial real estate write-downs, adding “It makes you wonder and raises the question for potential marks for the second quarter.”

Viniar also disclosed that the bank recorded about $300 million in gains from declines in the value of some of its liabilities.

“I’m not sure what to think, it’s almost too good to be true,” said Robert Lagravinese of Trinity Funds in New York. “I’m not sure how they avoid every problem that every other investment bank has. No one is that good, smart or lucky.”

Goldman had been a rare exception among banks as it avoided big mortgage losses and reported record 2007 results fueled by surprisingly strong trading and investment gains. Still, its stock has plunged 30 percent this year as investors worried the company’s earnings would feel the impact of the credit crunch.

As rumors swirl of 20 percent job cuts on Wall Street, Viniar expects Goldman will boost total headcount by low single digits, down from low double-digit rates in recent years.

Reporting by Joseph A. Giannone; Additional reporting by Kevin Plumberg; Editing by Derek Caney and Dave Zimmerman