Goldman Sachs profit beats expectations on bond-trading surge

[NEW YORK] Goldman Sachs Group Inc reported much bigger profits on Tuesday than Wall Street had been expecting, helped by a substantial rebound in bond trading.

Goldman, the fifth-largest US bank by assets, has historically been more reliant on bond trading than its peers, but the business has been suffering for years from weak volumes and costly financial reform rules.

However, the third quarter was a good one for bond trading revenue across Wall Street, thanks to Britain's surprise vote to quit the European Union and uncertainty about monetary policy in the United States and elsewhere. Goldman joined JPMorgan Chase & Co, Citigroup Inc and Bank of America Corp in reporting stronger results from the business.

Goldman's revenue from trading fixed-income securities, commodities and currencies jumped 34 per cent, to US$1.96 billion, from the third quarter of 2015. It was the biggest contributor to overall net revenue, which was also helped by big gains in Goldman's investing and lending business.

The bank generated US$2.1 billion in net income for common shareholders, up 58 per cent from the year-earlier period. It was the bank's second straight rise in quarterly profit after four quarters of decline.

Earnings per share rose to US$4.88 from US$2.90, partly because Goldman bought back roughly 22 million of its own shares over that time. Analysts on average had expected earnings of US$3.82 per share, according to Thomson Reuters I/B/E/S.

Chief Executive Lloyd Blankfein described it as "solid performance" across Goldman's franchise.

Goldman's shares, which have fallen 6.2 per cent this year, were up 1.9 per cent at US$172.21 in early trading. Its chief rival, Morgan Stanley, is due to report results on Wednesday, wrapping up what has been a better-than-expected reporting period for big US banks.

In addition to revenue gains, Goldman was helped by keeping a lid on costs. The bank launched an efficiency program earlier this year, with the goal of reducing annual expenses by US$700 million.

Operating expenses rose 10 per cent compared to a 19 per cent rise in revenue, and staff levels were down 5 per cent over the year-earlier period.

Goldman's return-on-equity - a closely watched measure of how well a bank uses shareholder money to generate profit - was 11.2 per cent in the quarter. Those returns have been weighed down by higher capital requirements imposed following the 2007-2009 financial crisis. Analysts and investors generally expect big banks to produce returns of at least 10 per cent to meet their basic cost of capital.

Revenue from investments and loans Goldman makes with its own balance sheet more than doubled, to US$1.4 billion. The bank attributed the rise to higher stock market values.

Investment banking revenue, which includes income from advising on mergers and acquisitions as well as underwriting bond and share offerings, fell 1.2 per cent to US$1.54 billion.

Goldman topped all banks globally in M&A fees in the quarter, a slow one for deals, but trailed JPMorgan in revenue from underwriting bond and equity offerings, according to Thomson Reuters data.

Its investment management division generated revenue of US$1.49 billion, up 4 per cent from the year-ago period.

REUTERS