December 5, 2023

DealBook: Goldman Sachs Reports Disappointing Profit of $1.05 Billion

The entrance to Goldman Sachs on Wall Street.Shannon Stapleton/ReutersThe Wall Street entrance to Goldman Sachs.

8:45 a.m. | Updated Goldman Sachs reported profit of $1.05 billion on Tuesday, a weak showing that reflected the firm’s costly move to reduce risk and cut back trading activities.

The performance of the investment bank, which has largely shed the legacy of the financial meltdown, points to the new reality on Wall Street. Amid regulatory and economic uncertainty, Goldman is struggling to lift its earnings power to precrisis levels.

The second-quarter profit of $1.85 a share fell short of analysts’ expectations of $2.27 a share, according to Thomson Reuters. Still, it was an improvement for the period a year earlier, when Goldman posted a profit of $453 million, or 78 cents a share.

The fixed-income department took a big hit in the quarter. The unit, which includes fixed Income, currency and commodities client execution, logged net revenue of $1.60 billion, 53 percent lower than in the second quarter of 2010; results were down in mortgages, commodities and interest rate products.

The firm substantially reduced its risk in the three months ended June 30, an overly conservative approach that cost millions in the short term, said a person with knowledge of the matter who was not authorized to speak on the record. Goldman, in part, hedged its trading activities, a move that ate into profit. It also robbed the company of the upside in certain commodities like oil, the person said.

By one key measure, Goldman — usually considered one of Wall Street’s biggest risk takers — played it safer than in the past. Its value at risk, roughly what the firm could lose on an average day because of bad market conditions, fell to $101 million in the second quarter, down 10 percent from the first three months of the year.

Lloyd C. Blankfein, chief executive of Goldman Sachs.Chris Kleponis/Agence France-Presse — Getty ImagesLloyd C. Blankfein, chief executive of Goldman Sachs.

“During the second quarter, the operating environment was more difficult given global macroeconomic concerns,” said Lloyd C. Blankfein, Goldman’s chairman and chief executive. “In addition, certain of our businesses had disappointing results as we reduced our market risk in response to attempting to manage fluctuations in prices and market liquidity.”

Not all banks were created equal this quarter, and others appeared more willing to take risk than Goldman. With its diversified business model, JPMorgan Chase posted a quarterly profit of $5.4 billion, up 13 percent from the period a year earlier. Citigroup also had a strong showing, as improvements in lending helped offset lackluster trading results.

By comparison, Goldman is more dependent on the commissions generated from trading, which dropped sharply in recent months. Overall revenue at the bank fell to $7.28 billion from $8.8 billion in the period a year earlier.

“Trading activity has been extremely slow,” said a Nomura stock analyst, Glenn Schorr, who accurately predicted the bank’s earnings at $1.85 a share.

While the decision to dial back risk ate into profits in Goldman’s fixed income department, the firm’s other divisions posted decent returns. Net revenue in investment banking was $1.45 billion, 54 percent higher than the second quarter of 2010. Within investment banking, bond underwriting saw the best rise in net revenue, increasing 77 percent over year-ago levels to $433 million. Net revenue in investment management was $1.27 billion, 12 percent higher than the second quarter of 2010.

Another closely watched number at Goldman is the compensation ratio, or percentage of net revenue allocated to pay employees. It has set aside $8.44 billion for compensation this year, while it had earmarked $9.3 billion during the same period in 2010.

Most of the compensation at the firm, which comes in the form of one-time bonuses, is not allocated until the fourth quarter, so it is too early to predict the final numbers. But compensation will most likely fall if the results do not improve in the second half of the year.

In an attempt to reduce overall costs, Goldman is planning to layoff employees and cut $1 billion in noncompensation expenses in the next 11 months.

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