Goldman Sachs Group CEO Lloyd Blankfein
NEW YORK (Reuters) – Goldman Sachs Group Inc (GS.N) said quarterly profit plunged 70 percent as the worst market slump in decades led to weaker-than-expected revenues, knocking the stock to its lowest level in nearly three years.
Still, the larger of the two major U.S. investment banks still standing, beat profit expectations on Tuesday, even as it recorded $1.1 billion in write-downs and losses from its principal investments. It was the biggest earnings decline since Goldman went public in 1999.
Goldman shares dropped 2.5 percent in afternoon trading.
The results upset investors during a week in which Lehman Brothers filed for bankruptcy and Merrill Lynch (MER.N) agreed to sell itself to Bank of America (BAC.N).
“People were hoping for some good news in a sea of gloom, and I don’t think they got it,” said Matt McCormick, portfolio manager and analyst at Bahl & Gaynor Investment Counsel.
Banks and brokers have recorded more than half a trillion dollars in write-downs over the past year as the U.S. mortgage crunch has widened into a full-blown credit crisis that shows no signs of abating.
Goldman so far has navigated the turmoil better than its peers, avoiding big write-downs. Yet Goldman executives acknowledged their business follows the global economy and right now conditions are grim.
In response, the company is playing defense — hoarding capital and cash, and shedding risky assets.
“We’ve become even more cautious in our approach,” Goldman Chief Financial Officer David Viniar told reporters.
IN THE BLACK
Net income fell to $845 million, or $1.81 a share, for the fiscal quarter ended August 29, from $2.85 billion, or $6.13, a year earlier. Net revenue fell by half to $6.04 billion as deal activity slowed, trading conditions worsened and a broad range of assets fell in price.
Earnings beat analysts’ reduced expectations of $1.75 a share, but revenue fell short of the consensus target of $6.3 billion, according to Reuters Estimates.
Goldman shares fell $3.40 to $132.10 after dropping as low as $117.24 on the New York Stock Exchange.
On Monday they dropped 12 percent to a five-year low, the biggest one-day drop in more than eight years, as the credit crunch picked up momentum in its second year.
Morgan Stanley (MS.N), which is to report its quarterly results on Thursday, saw its shares drop as much as 27 percent. In afternoon trade, they were down 13.4 percent to $27.99 as investors worried that its report will be equally grim.
Lehman Brothers Holdings Inc (LEH.P) filed for bankruptcy protection on Monday, while a struggling Merrill Lynch & Co Inc rushed into the arms of Bank of America Corp over the weekend. Six months ago, Bear Stearns collapsed and was acquired by JPMorgan Chase & Co (JPM.N).
Meanwhile, insurer American International Group Inc (AIG.N) scrambled Tuesday to avert a cash crunch, urging government officials to help sustain it. Efforts by Goldman and JPMorgan to raise $75 billion in debt from private sources have been fruitless so far.
With three of the top five U.S. investment banks leaving the scene, some analysts have speculated that Goldman and Morgan Stanley could themselves face market pressure. Several observers predicted Goldman would acquire a deposit-rich bank to provide stable funding in jittery markets.
Viniar, though, contended Goldman that neither wants nor needs to merge with a commercial bank.
“It feels like we’ve been able to compete just fine,” he said. Problems seen at other banks reflected “their execution, not their business model.”
BANKING REVENUE DROPS
As expected, Goldman’s investment banking revenue dropped 40 percent amid a dearth of deal activity. Fixed-income trading revenue plummeted by two-thirds, reflecting weak credit and mortgage trading results. Equities trading revenue fell by one-half.
The backlog of pending investment banking deals increased in the quarter, Viniar said, fueled by new M&A advisory assignments. That increase could lead to rising revenue in future periods as deals are completed.
But Goldman wasn’t completely unscathed by the crisis. The latest quarter included $1.1 billion in losses on loans for junk-rated companies, residential and commercial mortgages.
Moreover the firm lost $453 million on principal investments, showing the occasional downside of making aggressive bets with house money. Asset management revenue fell 6 percent, reflecting declining markets and clients withdrawing a net $7 billion of assets from funds.
Some analysts said Goldman beat expectations because it paid unusually low taxes — an effective rate of 12 percent compared with 34 percent last year.
That said, some investors said Goldman deserves credit for reporting a profit at all. Indeed Goldman shares, down as much as 14 percent earlier in the session, recovered in midday trading after an analyst conference call.
“We have probably not seen a more challenging environment than the one that we are going through right now,” said Holland & Co chairman Mike Holland. “For them to perform in this manner, in this environment, is nothing short of heroic.”
Last week, Lehman reported a third-quarter loss of $3.9 billion, on the heels of a $2.8 billion second-quarter loss, fueled by nearly $8 billion in write-downs as well as steep declines in banking, underwriting and trading revenue.
The losses, and worries that it lacked enough capital, ultimately forced the 158-year-old firm into bankruptcy.
(Additional reporting by Jonathan Spicer, Elinor Comlay and Dan Wilchins; Editing by John Wallace, Maureen Bavdek and Jeffrey Benkoe)
By Joseph A. Giannone
Sept. 16, 2008