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Goldman Sachs Stock (NYSE: GS) Won't Rebound on These Earnings

By , Contributing Writer, Money Morning •

Goldman Sachs Group (NYSE: GS) handily beat second-quarter earnings and revenue when it reported numbers today (Tuesday) before market open - but that's not too hard to do since expectations had slipped drastically over the past couple months.

The investment banking giant's earnings per share came in at $1.78, blowing away analysts' estimates of $1.18. Revenue came in at $6.63 billion, better than the expected $6.28 billion.

A couple months ago these numbers would have actually disappointed.

In the last two months, expectations for the quarter had dwindled. The average earnings per share forecasts dropped to the current $1.18 per share from $2.16 in June and $2.87 in May. Looking back to the same quarter a year ago, earnings were $1.85 per share and revenue was $7.28 billion (8.9% better than the current quarter's revenue).

"During the second quarter, market conditions deteriorated and activity levels for both corporate and investing clients were lower given continued instability in Europe and concerns about global growth," Goldman Chairman and CEO Lloyd Blankfein said in a statement.

The weak economic environment will keep weighing on Goldman through the year.

Goldman Sachs: Devil's in the Details

In the past couple of years, Goldman's customarily strong trading and investment banking units have been fading as investors have taken a more cautious stance.

Retail investors have avoided making big wagers and institutions have avoided big deals, preferring to stash cash. The number of announced mergers in the quarter was the second lowest since the third quarter of 2009, according to data from Dealogic.

Goldman also lost $194 million on its stake in Industrial & Commercial Bank of China, and lost another $112 million its equity positions in other companies, resulting in an 81% drop in second-quarter revenue from its investing and lending business.

The bank behemoth is also facing regulatory roadblocks that limit its ability to make investments with its own funds. The Volcker rule, part of the Dodd Frank reform, is putting limits on how much money Goldman and other banks can put at risk. Trading risk fell from $101 million a year ago and $95 million in the first quarter to $92 million.

Goldman must also prepare to be in compliance with new international rules that have increased the amount of reserves it must have in house to pad against future potential losses.

Amid the steep drop in revenue, Goldman managed to maintain its profit margins by sharply reducing expenses by 23% from a year earlier to $5.2 billion.

Goldman slashed its compensation expenses. The amount shelled out on salary and bonuses dipped 9% to $2.92 billion during the quarter from a year earlier. The average compensation per employee for the first half of 2012 dropped from $237,000 during the first half of 2011 to $226,000 in the latest quarter.

Goldman's head count, currently at 32,300 employees, also fell 9% from a year ago.

Goldman Announces Private Bank

Goldman is betting on a new in-house bank to add some spark and reshape its business.

The firm is creating a private bank that will cater solely to select wealthy customers worldwide. It will not involve any bricks-and-mortar retail branches or ATM services. Goldman has no plans of pitching credit cards or "giving away toasters," Blankfein told The Wall Street Journal.

What it will do is provide personal loans to individual and corporate clients. It will exist as a private bank for its prominent and affluent clients.

"We can afford to do that because we have the contacts and the balance sheet," Blankfein said.

The strategic push into banking will give Goldman more cushion by the way of more deposits, a source of low-cost funding that is less exposed to the erratic and unpredictable actions of financial markets.

Over the last 12 months, shares of Goldman have slipped 25%.In premarket trading, Goldman Sachs stock jumped 2% to $99.60. By mid-afternoon the stock was nearly unchanged.

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