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Goldman Sachs Group Inc. (NYSE: GS) earnings reported today (Tuesday) beat expectations, but still showed a 23% profit drop from a year ago – will investors dump it for banks with better earnings?
Goldman Sachs Stock Price History
Goldman said revenue from trading bonds, currencies and commodities was not as robust as counterparts JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC). The decline pushed first-quarter net income to $2.11 billion, from $2.74 billion the year before.
The bank still beat analysts' forecast of $3.55 earnings per share (according to 24 analysts polled by Bloomberg News), coming in at $3.92 – although expectations were set fairly low.
The earnings news pushed shares down more than 2% in premarket trading.
"Although earnings actually beat consensus, I think that the results look somewhat disappointing in comparison with the strong numbers we've seen out of JPMorgan and Citigroup," Richard Staite, an analyst at Atlantic Equities LLC in London, said in an interview with Bloomberg. "The market had perhaps hoped for a real blow-out quarter from Goldman Sachs."
This isn't the first weak earnings announcement from the big bank. It recorded a quarterly loss last fall, only its second since going public in 1999. In 2010 and 2011, its net income fell year-over-year in six of the eight quarters.
While mixed earnings aren't shocking from an industry still adjusting to a post-financial crisis landscape, Goldman's lackluster numbers could drive investors toward better-performing and less controversial firms.
Goldman Sachs (NYSE: GS) Mixed Earnings
Goldman Sachs, the fifth-largest U.S. bank by assets, lost 20% in fixed-income trading last quarter.
That's more than JPMorgan, the biggest U.S. bank by assets, which saw an 11% slip in fixed-income trading, and No. 3 Citigroup (NYSE: C), which lost 4%.
Goldman's revenue fell 16% to $9.95 billion, beating analysts' expectations of $9.41 billion.
While most results fell short of 2011's first quarter, they did show gains from the previous quarter. Total trading revenue soared 87% from the fourth quarter on due to gains in stock and corporate debt markets.
Goldman CEO Lloyd Blankfein hopes market gains and business expansion will drive profits the rest of the year.
"Our mix of businesses gives the firm significant room for revenue growth as economic and market conditions continue to improve," Blankfein said Tuesday in a statement.
Goldman also announced a 31% dividend increase to 46 cents a share, for a 1.6% yield.
Goldman's profits have suffered in recent quarters because of lower demand for trading and investment banking services. Investment banking revenue was down 9.1% from last year.
Blankfein has been cutting costs to try and improve Goldman's numbers. The firm reduced banker compensation last quarter by 16%, and cut its workforce by 3%.
"Goldman Sachs is attempting to modify its business model," Alliance Bernstein analysts told The Financial Times before the results. "The firm will operate with a more limited balance sheet and altered trading business models."
Goldman also scaled back its risk. Daily value-at-risk – the amount a firm expects it could lose in one trading day – fell to $95 million from $135 million last quarter.
Can GS Stock Keep Gaining?
Goldman's new business model will have to lead the firm through a future of new financial regulation and increasing resentment toward big banks – think more Occupy Wall Street-like protests.
So far this year financial stocks have managed to curtail problems and rise with the overall market. Goldman stock has climbed 30% — but the industry is shrouded in uncertainty going forward.
Goldman could be hit harder than others by increased financial regulation like the Volcker Rule, which prevents banks from trading from their own book. Goldman also will have to comply with the Basel III rules requiring banks to hold a certain percentage of capital.
The firm also had to engage in some damage control last quarter when employee Greg Smith wrote a scathing op-ed for The New York Times as his farewell speech on the day he quit. The scandalous move drove GS stock down 3.4% March 14, cutting Goldman's market value by $2.2 billion.
Smith called Goldman's culture "toxic and destructive," and said executives condescendingly refer to clients as "muppets."
"I truly believe that this decline in the firm's moral fiber represents the single most serious threat to its long-run survival," wrote Smith.
The uproar surrounding Smith's attention-grabbing exit has cooled, but did cast another mark on Goldman's already tarnished reputation. It gave another reason for Goldman to be the most popular poster child for a greedy Wall Street mentality.
GS stock fluctuated in morning trading, up about 0.2% to $117.97 by 11 a.m. EDT.
News and Related Story Links:
- The Financial Times:
Goldman Sachs results beat expectations