Goldman Sachs shares slump after posting worse-than-expected revenue decline

It's only Goldman Sachs CEO David Solomon's second quarter running the bank, but analysts will have plenty of questions for him. Read more...

Goldman Sachs shares declined after posting first-quarter revenue below analysts’ estimates on tougher market conditions for the firm’s trading and investing divisions.

The bank said Monday that revenue dropped 13 percent to $8.81 billion, below analyst’s $8.9 billion estimate. Meanwhile, the firm generated $2.25 billion of profit in the period, or $5.71 a share, exceeding the $4.89 estimate, the New York-based firm said in a release. That was largely from reining in compensation more than analysts had expected, according to a research note from Citigroup.

Goldman shares fell 3% to $201.50 at 10:38 a.m.

“We are pleased with our performance in the first quarter, especially in the context of a muted start to the year,” Goldman CEO David Solomon said in the release. “Our core businesses generated solid results driven by our strong franchise positions. We are focused on new opportunities to grow and diversify our business mix and serve a broader range of clients globally.”

Considering the impact that tough trading conditions had on revenue, Goldman pulled a lever at its disposal: It lowered compensation for its employees. The bank booked $3.26 billion in pay and benefits for the quarter, 20% less than a year ago and well below the $3.58 billion estimate. The firm also trimmed headcount by 2% from the fourth quarter.

Its institutional client services trading division, the firm’s biggest business by far, posted $3.61 billion in revenue for the quarter, an 18 percent decline from a year earlier. Revenues from fixed income and equities trading came in at $1.84 billion and $1.77 billion, essentially matching analysts’ estimates.

The company’s investment banking division posted revenue of $1.81 billion, roughly unchanged from a year earlier, as the firm’s advisory revenue jumped 51% to $887 million on robust mergers and acquisitions activity. That handily exceeded the $744 million estimate.

The investing and lending segment posted $1.84 billion in revenue, a 14 percent decline that was just shy of analysts’ $1.87 billion estimate. The drop was driven by “significantly lower net gains” from stakes in private equities and debt holdings.

But it was in Goldman’s smallest division, investment management, where results missed analysts expectations by the biggest margin. Revenue dropped by 12% to $1.56 billion, below analysts’ $1.71 billion estimate, on “significantly lower incentive fees and lower transaction revenues” amid tough markets.

The firm’s provision for credit losses climbed to $224 million in the quarter, roughly unchanged from the previous period but surging from the first quarter of 2018, where it was $44 million, as Goldman expanded its retailing lending operations.

The bank’s board voted to increase its quarterly dividend by 5 cents to 85 cents per share, a move that had been expected by investors.

It’s only Solomon’s second quarter running the bank, but analysts will have plenty of questions for him.

The investment bank, which historically counted governments, corporations and hedge funds as clients, took a notable step in its journey into consumer finance last month when its joint credit card with Apple was announced. Analysts will want to know what the economics of the deal mean for the New York bank.

The firm is working to grow existing businesses, diversify its businesses with new products and services and improve efficiency, Solomon said Monday.

Still, of the six biggest U.S. banks, Goldman is the most dependent on Wall Street activities, and that exposes them to the decline in trading in the quarter. J.P. Morgan Chase said last week that first-quarter trading revenue dropped 17 percent to $5.5 billion.

Solomon or CFO Stephen Scherr might also provide updates on a strategic review announced in October and progress on the bank’s $5 billion revenue-boosting plan, according to analyst Jason Goldberg of Barclays.

The bank is cutting expenses and capital from underperforming parts of the commodities business, Scherr said.

Another topic of discussion may be the bank’s 1MDB scandal. Goldman’s shares were battered last year in part because of the scandal, in which an ex-Goldman partner admitted to helping a Malaysian financier loot an investment fund of billions of dollars.

The shares have partially recovered this year, climbing more than 20 percent.

Here’s what Wall Street expected:

Earnings: $4.89 a share, down 30% from a year ago, according to Refinitiv.
Revenue: $8.9 billion, down 10% from a year earlier.
Trading revenue: Equities $1.81 billion; fixed income $1.77 billion, according to FactSet
Investing banking: $1.65 billion

Also Monday, Citigroup reported mixed first-quarter results, saying its earnings were boosted by share buybacks while revenues fell amid a sharp decline in equities trading. J.P. Morgan and Wells Fargo reported quarterly earnings on Friday that topped analyst expectations.

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