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Goldman Sachs profit surges as bond trading picks up

Thursday, October 16, 2014 - 20:51
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Goldman Sachs Group Inc reported a 50 per cent jump in third-quarter net profit on Thursday as last month's sudden pickup in bond market activity helped to boost trading revenue - PHOTO: REUTERS

[London] Goldman Sachs Group Inc reported a 50 per cent jump in third-quarter net profit on Thursday as last month's sudden pickup in bond market activity helped to boost trading revenue.

Net income attributable to common shareholders rose to US$2.14 billion, or US$4.57 per share, from US$1.43 billion, or US$2.88 per share, a year earlier.

Analysts on average had expected earnings of US$3.21 per share, according to Thomson Reuters I/B/E/S.

Revenue from bond-trading, a notoriously volatile business, increased 74 per cent to US$2.17 billion as strong US economic data, stimulus measures by the European Central Bank, and the surprise exit of trading superstar Bill Gross from giant bond-trading firm Pimco jolted what had been a listless market.

Goldman's fixed-income, currency and commodities (FICC) business has been on a declining trend since 2009 as new rules discourage banks from trading on their own book, and many have wondered whether the industry will ever truly rebound.

But Goldman says it sees a long-term future in the business as rivals scale back or quit, leaving it to fill the gap.

The FICC business contributed about 26 per cent of overall revenue in the latest quarter, compared with about 40 percent of annual revenue in 2009 and 25 per cent last year. "It is a positive indication that the long drought on the trading floor may be nearing an end," said Chris Kotowski, an analyst with Oppenheimer & Co.

The bank, also one of the biggest beneficiaries of the resurgence in equity capital markets this year, said revenue from equity underwriting rose 54 per cent to US$426 million.

Goldman ranked No 1 for both equity underwriting and advisory services in the first nine months of 2014, according to Thomson Reuters data, helped by its work on big deals including the US$25 billion IPO of Alibaba Group Holding Ltd.

Goldman's shares were down 2.7 per cent at US$172.45 in premarket trading. Global equity markets have been on a slide in recent days on worries about the health of the global economy, and bank shares have been hit hard.

Chief Executive Lloyd Blankfein cited improving economic conditions for the bank's performance, but acknowledged that"conditions and sentiment can shift quickly." Total net revenue rose 25 per cent to US$8.39 billion.

Overall investment banking revenue, which includes M&A, and debt and stock underwriting, rose 26 per cent to US$1.46 billion.

Revenue from investment management, a business Goldman has been trying to build up, rose 20 per cent to US$1.46 billion.

Like other banks, Goldman has been trying to cut costs - particularly compensation. But compensation expenses rose 18 per cent while total operating expenses increased 12 per cent Goldman's annualized return-on-equity was 11.8 per cent, for a return of 11.2 per cent for the first nine months of the year.

That's above the 10 per cent minimum analysts generally consider to be a bank's cost of equity, but far below the 30 per cent or more the bank earned in better times. REUTERS