By Olivia Oran and Sruthi Shankar
In a rare fumble for what is usually a market-savvy Wall Street bank, Goldman Sachs Group Inc missed earnings expectations on Tuesday due to a drop in trading revenue even as its rivals reported major trading gains. Goldman, the fifth-largest U.S. bank by assets, blamed weakness in commodities, currencies, and credit revenue, as well as lower commissions and fees from equities trading. But the results came in sharp contrast to those from JPMorgan Chase & Co, Citigroup Inc and Bank of America Corp, which all beat estimates due to strength in trading. On a conference call with analysts, Goldman’s newly appointed finance chief, R. Martin Chavez, said that while markets improved during the quarter, a lack of volatility meant clients were trading less. During the period, the CBOE Volatility Index reached its lowest level since before financial crisis. Oil prices were also trading at years-low volatility levels.But the lack of volatility did not hurt competitors and management had a hard time clarifying what went wrong at Goldman Sachs. On the call, analysts were unusually tough, with all but one of six pressing Chavez and outgoing CFO Harvey Schwartz about trading results, especially in fixed income.
Credit Suisse analyst Christian Bolu said Goldman investors were showing some "nervousness" about the strength of the business, and UBS's Brennan Hawken chastised the performance, saying that topping the prior year should have been "kind of easy.""I'm not fully - I'm still confused," said Hawken, adding, "I have some company." Goldman's shares tumbled 4.2 percent to $216.80.
Trading revenue, which is Goldman’s biggest contributor to total revenue, dropped 2 percent to $3.4 billion in the first quarter. Equities trading revenue fell 6 percent while fixed income trading was flat, though analysts were more disappointed in that business relative to their expectations.In the best of times, Goldman generated more than $6 billion in quarterly fixed-income trading revenue. In more recent years, the business has come under pressure from factors including weak market activity and new regulations that restrict what U.S. banks can do and how much capital they must hold against trades. Goldman's profit rose from a difficult year-ago quarter, with earnings per share of $5.15 versus $2.68. But the results were well short of analyst forecasts of $5.31 per share, on average, according to Thomson Reuters I/B/E/S. Goldman has historically relied more on trading than other big banks, but has been trying to shift to relatively stable businesses like investment management and lending.
Revenue from investment banking, investment management and investing and lending all rose in the first quarter, but not enough to offset the sharp decline in trading. Overall, Goldman's profit rose 80 percent to $2.2 billion from $1.2 billion in the first quarter of 2016, when sliding commodity prices, worries about the Chinese economy and uncertainty about U.S. interest rates led to weak results across Wall Street. Its revenue rose 27 percent to $8 billion from $6.3 billion. The bank's expenses rose just 15 percent and it paid out a smaller share of its revenue to employees. Its closely watched compensation-to-revenue ratio was 41 percent in the first quarter, down from 42 percent a year earlier, but higher than the 38 percent ratio it reported for all of 2016. Goldman's chief rival Morgan Stanley will report on Wednesday. (Reporting by Sruthi Shankar in Bengaluru and Olivia Oran in New York; Writing by Lauren Tara LaCapra; Editing by Sriraj Kalluvila and Meredith Mazzilli)
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Updated Date: Apr 18, 2017 22:01 PM