Goldman Sachs Group Inc. said earnings doubled, beating analysts' estimates on a surge in underwriting revenue and gains from the firm's own investments.
Second-quarter net income rose to $1.93 billion, or $3.70 a share, from $962 million, or $1.78, a year earlier, the New York-based company said today in a statement. That beat the $2.89 average estimate of 27 analysts in a Bloomberg survey.
Gains from the firm's debt investments almost tripled and fixed-income trading climbed 12 percent as Chief Executive Officer Lloyd C. Blankfein, 58, led Goldman Sachs through a drop in bond prices sparked by indications in May that the Federal Reserve may ease economic-stimulus measures. The bank has said it will benefit from a rebound in the U.S. economy and $1.9 billion in expense cuts completed last year.
"In a recovering economy, investment-banking picks back up and fixed income doesn't drop off a cliff," Brad Hintz, an analyst at Sanford C. Bernstein & Co., said in a Bloomberg Radio interview before the results were announced. "With Goldman, you should be at a point where you're going to get the expansion in investment banking."
Goldman Sachs fell $2.31, or 1.4 percent, to $160.69 at 12:32 p.m. in New York. The stock had gained 28 percent this year through yesterday after advancing 41 percent in 2012. The shares are still below their pre-crisis peak of $247.92 on Oct. 31, 2007.
The firm's earnings beat estimates primarily because of higher-than-expected gains from the Investing and Lending segment that includes the firm's own holdings and a lower tax rate, Roger Freeman at Barclays Capital and Keith Horowitz at Citigroup Inc. wrote in research notes.
The tax rate fell to 27 percent from 32 percent in the year-earlier quarter as Goldman Sachs permanently reinvested some earnings outside of the U.S. Chief Financial Officer Harvey Schwartz said the lower rate was likely to be a one-time event.
"It's a relatively low-quality beat with 85 percent of the upside relative to our numbers driven by higher Investing & Lending revenue as well as a favorable tax rate," Horowitz wrote in a note to investors today.
Investment-banking revenue jumped 29 percent to $1.55 billion in the quarter, led by record debt underwriting fees. The firm had $3.12 billion of revenue from that business in the first half, the most since 2007.
Total revenue rose 30 percent to $8.61 billion. Compensation, the firm's biggest expense, increased 27 percent to $3.7 billion and amounted to 43 percent of revenue for the quarter, down from 44 percent a year earlier. The ratio was 38 percent for all of 2012.
"While the operating environment has shown noticeable signs of improvement, we continue to put a premium on disciplined risk management, particularly in regard to the firm's strong capital and liquidity levels," Blankfein said in the statement.
Goldman reported a return on equity of 10.5 percent in the quarter, up from 5.4 percent in the year-earlier period. The bank repurchased $1.6 billion of shares during the quarter.
"We view this as the company slowly clawing its way back to a normalized ROTCE via the stabilization in markets combined with share repurchases," Chris Kotowski, an Oppenheimer & Co. analyst, wrote today in a report, referring to return on tangible common equity, a measure of profitability.
JPMorgan Chase & Co., the biggest U.S. bank by assets, reported earnings on July 12 that beat estimates as trading revenue increased 18 percent and CEO Jamie Dimon said his traders performed well in managing a plunge in emerging-market assets. Citigroup yesterday reported a 68 percent jump in equity-trading revenue, topping analysts' estimates.
Bank of America Corp., the second-largest lender, is set to release results tomorrow. Morgan Stanley, the sixth-biggest bank, is due on July 18.
The Investing and Lending unit, which includes gains and losses on Goldman Sachs's own investments in stocks, debt, real estate, private equity and hedge funds, as well as loans, posted second-quarter revenue of $1.42 billion, up from $203 million a year earlier.
That topped estimates of $850 million from Richard Staite at Atlantic Equities and $662 million from Citigroup's Horowitz. Gains from debt securities and loans were $658 million, up from $222 million a year earlier. Equity investments contributed $462 million, compared with a loss of $306 million in the second quarter of 2012.
"The size of the gains was surprising given the widening in credit spreads during the period," Staite wrote in a note to investors.
Fixed-income, currency and commodity trading revenue was $2.46 billion, down 23 percent from the first quarter. That compared with analysts' estimates of $2.67 billion from Horowitz and $2.45 billion from Staite.
Long-term interest rates rose and risk premiums on debt widened in June after Fed Chairman Ben S. Bernanke indicated the central bank might taper its $85 billion in monthly bond purchases, which have boosted demand for higher yielding assets. Blankfein had warned in May that some investors might be caught off guard when rates rose.
Goldman Sachs President Gary D. Cohn said in May that the notion that banks would have trouble generating fixed-income revenue amid rising rates was an "urban legend," and added that the firm tended to be neutral to interest rates in its trading book.
Revenue from the equities division rose 9 percent from a year earlier to $1.85 billion. That compared with Staite's $1.85 billion estimate and Barclays Plc's Roger Freeman's $1.72 billion projection.
Total revenue from sales and trading, led globally by Pablo J. Salame and Isabelle Ealet, was $4.31 billion. That was below the $4.32 billion reported by Citigroup and $5.37 billion at JPMorgan.
Second-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, climbed to $1.55 billion. That compared with JPMorgan's $1.72 billion in investment-banking revenue and Citigroup's $1.04 billion.
The figure at Goldman Sachs included $486 million of financial-advisory revenue, including fees for takeover advice, an increase of 4 percent. Revenue from underwriting, a business led by Stephen M. Scherr, climbed to $1.07 billion in the second quarter, including $695 million from debt underwriting and $371 million for equity offerings.
Goldman Sachs held the top spot among arrangers of global equity, equity-linked and rights offerings in the first half, according to data compiled by Bloomberg. It ranked first in advising on announced mergers and acquisitions and fourth in underwriting U.S. bonds, the data show.
The firm didn't disclose its so-called leverage ratio. U.S. regulators last week proposed minimum levels of 5 percent for holding companies and 6 percent for banking subsidiaries. The U.S. plan goes beyond the 3 percent global minimum requirement that the Basel Committee on Banking Supervision approved to help prevent a repeat of the 2008 financial crisis.
Goldman Sachs in May sold its remaining stake in Industrial & Commercial Bank of China Ltd., ending a seven-year investment that produced more than $3 billion of reported gains. The bank's timing of the sale likely saved it from posting a loss on the investment of more than $100 million for the quarter. Blankfein said in May that the firm would be open to an equity investment of similar size in the future.
Revenue from asset management was unchanged at $1.33 billion. Total assets under management decreased $13 billion during the quarter to $955 billion. Blankfein said in May that he devotes a "very, very high percentage" of his attention to building that business since it offers the potential for growth even if markets don't improve.