Goldman profit plunges on weak bond trading, legal provisions

Goldman Sachs reported its smallest quarterly profit in nearly four years on Thursday as it set aside more money to cover mortgage settlements and anxious investors pulled back from bond trading.

The bank said it set aside $1.45 billion (€1.33bn) for mortgage-related legal costs and regulatory matters in the second quarter, five times as much as in the same quarter last year.

As with its competitors, Goldman’s trading business - long a strength for the Wall Street bank - came under pressure as worries about Greece and China made investors reluctant to trade.

Net revenue from trading fixed-income securities, currencies and commodities (FICC) fell 28 per cent to $1.60 billion.

“FICC was a large miss and we believe this will likely cause consensus (earnings) estimates to move lower, or at best stay flat,” KBW Inc analyst Brian Kleinhanzl wrote in a client note.

JPMorgan Chase & Co’s FICC revenue fell 10 per cent during the period on an adjusted basis, while Bank of America’s fell 9.3 per cent.

The business, which once contributed about 40 per cent of Goldman’s revenue, has been under pressure since the financial crisis as new rules discourage banks from trading off their own balance sheet and regulators demand that banks boost capital.

Other banks have shifted away from trading to focus on less-volatile businesses like wealth management, but Goldman executives have stressed the bank’s commitment to trading.

Still, the business accounted for only about 18 per cent of revenue in the quarter.

“While uncertainty in the EU weighed on investors’ level of conviction, many of our businesses continued to benefit from generally improving economic conditions,” chief executive Lloyd Blankfein said in a statement.

Investment banking revenue, which includes advising on deals and underwriting debt and stock offerings, rose 13 per cent to $2.02 billion.

Goldman ranked first in global mergers and acquisitions as well as in equity underwriting in the first half of 2015, according to Thomson Reuters data.

Goldman’s net profit attributable to shareholders more than halved to $916 million, or $1.98 per share, in the three months to June 30th, from $1.95 billion, or $4.10 per share, a year earlier. Provisions reduced earnings by $2.77 per share, the bank said.

Analysts on average had expected earnings of $3.89 per share, according to Thomson Reuters I/B/E/S. It was not immediately clear if the reported figures were comparable.

Citigroup, which also reported on Thursday, said its quarterly profit rose as restructuring and cost cuts paid off and legal expenses plunged.

Goldman’s traditional arch rival, Morgan Stanley, reports earnings on Monday.

The bank, whose shares were down 0.6 per cent in premarket trading, said revenue fell nearly 1 per cent to $9.07 billion.

Operating expenses rose 16 per cent to $7.34 billion, while total non-compensation expenses rose 48 per cent to $3.53 billion.

Reuters