Goldman Sachs Group Inc. on Tuesday reported sharp gains from investment banking and trading that helped shield the Wall Street leader from choppy market conditions, but investors remained unsure how long this could be kept up.
The world’s top investment bank joined Lehman Brothers Holdings Inc. in reporting second-quarter numbers that solidified record first-half earnings. But, eroding market conditions that began in May has left many guessing if this is all about to change — sending investors to the exits.
Goldman shares fell $5.75, or 4 percent, to close at $139.25 on the New York Stock Exchange, reflecting Wall Street’s nervousness. The rest of the financial services sector also dropped.
“The $64,000 question is if weak markets persist, how long” can strong quarterly returns be maintained, said Goldman Chief Financial Officer David Viniar. “There hasn’t been panic selling, but people have been reducing risks.”
Quarterly profit at Goldman Sachs climbed to $2.29 billion, or $4.78 per share, after preferred stock payments in the three months ended May 26 from $865 million, or $1.71 per share, in the year-ago period. Results benefited from the $700 million sale of a power plant to General Electric Co.
Results for the quarter were the firm’s second-best ever, but still below the record profits seen during the first quarter. The period again saw gains from investment banking, asset management and securities services operations, all of which powered revenue to $10.1 billion from last year’s $4.81 billion.
Goldman trounced Wall Street projections for a profit of $4.28 per share on $8.47 billion in revenue, according to analysts polled by Thomson Financial. In the first quarter, the nation’s largest securities firm by market value posted a profit of $2.48 billion on $10.3 billion of revenue.
“Recent market volatility has served as a reminder of the vital importance of investor confidence to the smooth functioning of the global financial system, but we take comfort from the continuation of strong global economic growth,” said President and Chief Operating Officer Lloyd C. Blankfein in a statement.
Blankfein has been tapped as the Wall Street firm’s next chairman and chief executive officer to replace Henry Paulson, who was recently nominated by President Bush as his next Treasury Secretary. Paulson has led the company to record profits over the past two years.
Blankfein’s tallest order likely will be showing skeptical shareholders how he’ll navigate the securities firm as global markets remain choppy on concerns rising interest rates will cause weakness in the stock markets, and cut into profit margins for U.S. investment banks. Goldman reported trading still performed well, while most of its profit was anchored by near-record merger and underwriting activity.
The New York-based firm posted investment banking revenue of $1.53 billion, up 87 percent from the year-ago period and its second-best performance in its history. Driving results were fees from not just mergers and acquisitions, but a robust initial public offering market. During the quarter, Goldman advised on blockbuster deals such as the Bank of China $11.2 billion public offering and MasterCard Inc.’s $2.4 billion flotation.
Fixed income, the securities firm’s biggest business that includes currency and commodities trading, jumped 15 percent to a record $4.32 billion.
Equities trading revenue — an area that was expected to be sluggish due to a market downturn toward the end of the quarter — rose to $2.35 billion from $1.11 billion, its second best performance ever. Revenue from asset management and securities services rose 37 percent to $1.61 billion.
The results were not seen as enough to easily convince investors that Goldman, and other investment banks, can withstand further market declines, according to analysts.
“We don’t believe the report is impressive enough to make the market reverse its recent negative sentiment and risk-aversion,” Fox-Pitt Kelton analyst David Trone said in a research note.
Viniar would not comment on how he expects the markets to play out during the third quarter. However, he said recent turbulence seen in global equity markets has not had too much of an impact on Wall Street deal making.
“If you look around the markets, a lot of big deals have gotten done and gotten done well,” he said. “Very few have been pulled or delayed, and the backlog of transactions continue to grow.”
The flip-side, he said, is that a steep slowdown for another six weeks would hurt Goldman’s business. “Right now,” he said, “there has not been a decline in confidence levels.”
Goldman also took on more risk this quarter. Traders more than doubled their “value-at-risk” — the amount of money Goldman could lose in a single day — to $112 million from last year. This also increased from the first quarter’s $92 million.
Viniar also noted hedge funds — many of which use Goldman to broker major deals — have been struggling amid recent economic turmoil. He said hedge fund customers have been giving back gains during the period, but added they are not in “panic risk-reduction mode.”
With Goldman and Lehman Brothers quarterly results out of the way, Wall Street will now be looking toward two other upcoming reports due out. Bear Stearns Cos. will post second-quarter results on Thursday, while Morgan Stanley Inc. comes out June 21.