DealBook: Goldman Sachs Trumps Expectations, As Revenues Fall

Goldman Sachs on Tuesday reported first-quarter net income of $2.74 billion, down 21 percent from the period a year earlier, as the investment bank took a big one-time hit to pay back the billionaire investor Warren E. Buffett.

The results, $1.56 a share in the quarter ended March 31, represent a big step backward from a year earlier when Goldman earned $5.59 billion. But the investment bank handily beat analysts’ expectations of 82 cents a share, according to Thomson Reuters.

Excluding the big payment to Mr. Buffett, the company posted a per-share profit of $4.38, with key businesses like investment banking and investment management experiencing a pickup.

Revenue from investment banking, for example, rose 5 percent, driven by a significant rise in bond and stock underwriting. But institutional client services, the largest unit, saw revenue decline 22 percent, to $6.65 billion.

“We are pleased with our first-quarter results,” Lloyd C. Blankfein, chief executive officer, said in a statement. “Generally improving market and economic conditions, coupled with our strong client franchise, produced solid results. Looking ahead, we continue to see encouraging indications for economic activity globally.”

The bulk of Goldman’s earnings decline reflected the cost of the lifeline extended to the investment bank by Mr. Buffett during the depths of the financial crisis. The government gave approval for Goldman to repay the money earlier this year as part of the second round of bank stress tests.

It was critical cash, but costly. Mr. Buffett’s Berkshire Hathaway pumped $5 billion into Goldman in 2008, and the bank paid back $5.64 billion — not including the hefty dividends it had previously coughed up.

Putting the Berkshire Hathaway deal aside, Goldman’s results were mixed, with some businesses showing signs of improvement and others continued weakness.

During a call with investors firm the firm’s chief financial officer David Viniar said Goldman saw increased client activity in quarter, despite continued economic concerns. Still he noted that business volumes were “subdued.”

Net revenue for investment banking came in at $1.27 billion, 5 percent higher than in the first quarter of 2010. Much of that growth came from stock and debt underwriting, while financial advisory was down 23 percent.

Investment management, too, was a strong point. Overall revenue rose 16 percent, to $1.3 billion.

Much of the firm’s weakness was centered on its largest division, institutional client services. Revenue for the unit dropped 22 percent, which helped drag Goldman’s total net revenue down 7 percent.

Revenue in the largest segment of institutional client services, which trades bonds, currencies and commodities, fell to $4.33 billion. That was 28 percent below results in the first quarter of 2010, a particularly strong period for Goldman. The division is a big money center for the bank, accounting for roughly 36 percent of all revenue generated in the first quarter.

In a nod to just how difficult the environment has become, Goldman’s annualized return on equity, a measure of profitability, fell to 12.2 percent in the quarter from 20.1 percent in the period a year earlier. In 2006, return on equity was 32.8 percent.

There has certainly been a lot of pain to go around. On Monday, Citigroup reported earnings of 10 cents a share, down from 15 cents a share in the period a year earlier, as it dealt with mortgage woes and sluggish economic growth. Similar factors hurt the results of Bank of America and JPMorgan Chase last week.

The lackluster economy and global uncertainty has weighed on financial stocks, too. Goldman closed on Monday at $153.78, down about 8 percent for the year. Shares of Goldman were down modestly in early trading on Tuesday.

There was some good news for shareholders in the earnings release. Goldman declared a dividend of 35 cents a common share, to be paid in June.

For the quarter, Goldman set aside $5.23 billion in compensation, down 5 percent from the period a year earlier. This represents almost 44 percent of the bank’s net revenue and is inline with how it previously compensated employees.

Goldman will not decide what it will pay out until the fourth quarter. There were also more people on the payroll — 35,400 at the end of quarter — up 7 percent from the period a year earlier.

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