Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. Tuesday posted higher-than-expected quarterly profits, fueled by surprising strength in bond trading and investment banking growth.
Earnings rose 30 percent at Goldman Sachs and 5 percent at Lehman, pushing their shares up 2.1 percent and 3.2 percent respectively in mid-morning trading on the New York Stock Exchange.
The Wall Street banks’ profits exceeded analysts’ estimates even as bond markets were marked by low volatility, which generally results in less trading and fees. The shrinking difference between long- and short-term bond yields also made it tougher to profit from borrowing money at short-term rates and lending at higher, long-term yields.
Glenn Schorr, an analyst for UBS Investment Research, said, "Revenues (were) a little better than expected, and expenses (were) well under control.”
The strong showings also helped push up shares of rivals Bear Stearns Cos. and Morgan Stanley , which analysts expect on Wednesday to report lower quarterly profit per share.
Goldman said net income rose to $879 million, or $1.74 per share, from $677 million, or $1.32 per share, a year earlier.
Analysts polled by Reuters Estimates on average forecast profit of $1.42 per share.
Revenue rose 20 percent to $4.53 billion, as Goldman Sachs generated improved results in several major business lines.
Revenue from investment banking rose 30 percent to $890 million, and from asset management and securities services rose 23 percent to $941 million.
Trading and principal investments revenue rose 15 percent to $2.7 billion. Goldman Sachs more than doubled revenue from fixed income, currencies and commodities to $1.87 billion, but equities-related revenue fell 17 percent to $910 million.
Principal investments posted negative net revenue of $79 million, largely because of a loss related to Sumitomo Mitsui Financial Group, whose shares have fallen as it competes in a takeover battle for a rival Japanese bank.
Lehman said net income rose to $505 million, or $1.71 per share, from $480 million, or $1.81 per share, a year earlier.
Analysts on average expected $1.55 per share. Per-share profit fell because Lehman had more shares outstanding than a year earlier.
Revenue rose 12 percent to $2.62 billion.
Revenue from capital markets rose just 2 percent to $1.7 billion. A 16 percent increase in fixed-income revenue to $1.38 billion, helped by strength in mortgage and asset-backed bonds businesses, offset a 33 percent drop in equities-related revenue to $319 million, which resulted in part from low trading volume and volatility.
“Fixed-income trading was better than expected ... That’s the real story,” said Jeffery Harte, an analyst with Sandler O’Neill & Partners.
Investment banking revenue rose 16 percent to $526 million, and private client and asset management revenue rose 75 percent to $397 million.
“Our businesses performed well during the third quarter despite the pressures of a more challenging market environment,” Chief Executive Richard Fuld said.
Goldman shares rose $1.90 to $93.58, while Lehman shares rose $2.30 to $78.32.
Bear Stearns shares rose 96 cents to $88.68, and Morgan Stanley shares rose 52 cents to $51.48.