Goldman Sachs Group, the world's biggest securities firm and the financial institution widely considered to have weathered the current storm in the markets better than its rivals, reported quarterly results topping those of competitors as the company said market turmoil continues to present opportunities.
The firm's results surpassed Wall Street analysts' expectations as gains in prime brokerage, asset management and commodities buoyed second-quarter profit.
Coming down to figures, Goldman Sachs said yesterday that second-quarter profit dipped modestly, sinking to $2.05 billion, or $4.58 cents a share, compared to $2.29 billion or $4.93 cents a share, earned in the same period a year ago. The firm reported total revenue, net of interest expenses, of $9.42 billion, down from $10.18 billion a year ago. This was its lowest second- quarter result since 2005.
Goldman fell $2.65, or 1.5 per cent, to $179.44 in New York Stock Exchange composite trading, the best performer of the biggest US investment banks. So far in 2008 the stock is down about 17 percent, compared with the 20 per cent plus drop of its peers. One of them, Morgan Stanley, is expected to declare its quarterly results today.
The results far surpassed those of rival Lehman Brothers which reported on Monday a loss of $2.8 billion, or $5.14 a share, for the second quarter ended 31 May. Write-downs on soured debt securities and bad trading results led Lehman to its first quarterly loss since the company went public in 1994. (See: Financial crisis claims jobs of Lehman CFO and COO)
Goldman's net revenue from investment banking totaled $1.69 billion, 2 per cent lower than the second quarter of 2007 but 44 per cent higher than the first quarter of 2008. Similarly, Goldman said net revenues in its trading and principal investments business fell 16 per cent from a year ago but rose 9 per cent form the first quarter.
Goldman's revenue from asset management rose 10 per cent from a year earlier as funds under management jumped to a record $895 billion, the company said. Securities services, which include Goldman's prime brokerage for hedge fund clients, reported a 30 per cent increase in revenue to $985 million in the quarter.
Principal investments recorded net revenues of $725 million for the second quarter of 2008. This reflected gains from corporate principal investments as well as a $214 million gain related to the firm's investment in the ordinary shares of Industrial & Commercial Bank of China Ltd., which completed an initial public offering in October 2006.
Financial advisory revenue, which includes income from the firm's top-ranked mergers and acquisitions group, rose 13 per cent to $800 million in the quarter from a year earlier. Debt underwriting fell 59 per cent, while equity underwriting climbed 72 per cent. The firm's so-called backlog of investment banking business dropped during the second quarter, Viniar said.
Goldman benefited from a lower tax rate, which declined to 27.7 per cent for the first half of the year from 34.1 per cent for the firm's 2007 fiscal year. David Viniar, Goldman's CFO, said that the rate fell because the company did more business ''in jurisdictions with lower tax rates.'' He declined to be specific.
He also expressed optimism that the financial turmoil, which had reached its peak in March, was now on the decline.
"It's pretty obvious that March was a really difficult period in the financial markets. The world has certainly improved since March," said Viniar. "I can't tell you it's going to be the low point going forward, but it certainly has been the low point through now."
The company's global core excess liquidity, a pool of cash and liquid securities, jumped to an average of $88 billion in the quarter from about $64 billion in the first quarter and is probably the highest ever, Viniar said.
Goldman also reduced its reliance on borrowed money by cutting its gross leverage ratio to 24.3 times in the second quarter from 27.9 times in the first quarter. The adjusted leverage ratio fell to 14.7 from 18.6, Viniar said. The firm currently has only $11 billion of leveraged buyout loans on its books as compared to $53 billion at the end of the third quarter of fiscal 2007, last August.
Moreover, Goldman sold about $2 billion of commercial real-estate loans in the quarter, while trimming residential mortgages by about $2.5 billion. Viniar said the reductions across those asset classes had the effect of trimming the firm's total Level III assets to $78 billion, down from $96 billion.
Level III assets are considered to be the riskiest. Some are so vague and trade so infrequently that investment banks have to value them based on mathematical models, rather than the market prices of similar or related securities.
The table below shows Goldman's second-quarter earnings from 2000 to present:
2008: $2.09 billion
2007: $2.33 billion
2006: $2.31 billion
2005: $0.87 billion
2004: $1.19 billion
2003: $0.70 billion
2002: $0.56 billion
2001: $0.58 billion
2000: $0.76 billion