Whoa, You've Got Goldman's Quarter All Wrong!
Goldman Sachs (NYS: GS) reported a loss yesterday. That's big news because, well, Goldman just doesn't do that. But just how much should we make of The Golden One's loss?
Over at The New York Times, the loss was seen as a serious aberration and a sign of things to come for the banking industry in general:
The misstep by the financial leader speaks to what could be a more lasting shift on Wall Street, which has been steadily retrenching over the last 12 months. While protesters a few blocks away were denouncing greed and "too big to fail" banks, the institutions themselves were coming to grips with the current diminished reality.
Could this be true? Is this a new era in which the great Goldman Sachs is suddenly hamstrung and unable to churn out massive profits? I don't think so. But let's take a closer look at the results from Goldman's business segments.
Fees from capital raising and merger and acquisition advisory services were down significantly from last year and a quarter ago. Why? Because capital raising and deal making were both down broadly. When there is uncertainty in the markets, fewer companies rush to raise money through vehicles like IPOs, and that hurts this part of the business. The same holds for M&A. What's important to remember here is that this is not a secular, "one quarter builds on the last"-kind of business; it's cyclical. Oh, and when it comes to M&A advising, Goldman is still No. 1.
Institutional client services
This is where Goldman does its trading and, generally, pumps out an insane amount of money. For the quarter, the segment was somewhat subdued with $4.1 billion in revenue, which was down 13% from the third quarter of last year. The soft results are primarily because of the bank's fixed income, currency and commodities division, which was off 36% from last year. Volatility continued during the quarter, so the company's explanation from last quarter -- "high levels of uncertainty and decreased levels of liquidity during the quarter contributed to difficult market-making conditions, particularly in mortgages and commodities, and prompted the firm to operate at generally lower levels of risk" -- probably still holds.
I don't expect markets to stay as volatile as they have been, nor do I expect Goldman to continue operating at reduced risk levels forever.
Investing and lending
Here's where Goldman took the big hit during the quarter. Net revenue was a negative $2.5 billion, largely because of falling markets and a hefty $1.1 billion drop in the value of Goldman's Industrial and Commercial Bank of China stake.
Should the bad results here be considered a sign of reduced earning power at Goldman? If you assume this means that Goldman is suddenly a terrible investor, then perhaps. But some perspective helps, too -- the bank had revenue of $1 billion here last quarter and $7.5 billion for all of 2010. It's also notable that this is the most volatile segment for Goldman -- pre-tax profit was $4.2 billion in 2010, but a loss of $660 million in 2009 and a hefty $13.5 billion in 2008.
If there's one segment of Goldman that's least prone to huge swings, it's this one. Aching equity markets don't help asset management businesses, but revenue for the segment was off just 4% from last year and the second quarter. The falling market helped bring down assets under management by $23 billion, but the bank still reported net inflows of $6 billion to bring total AUM to $821 billion.
It was far from a stellar quarter for Goldman, but once we put accounting gimmicks aside, it wasn't much of a quarter for the record books for most of the banks in the sector including powerhouse JPMorgan Chase (NYS: JPM) , Bank of America (NYS: BAC) , and close rival Morgan Stanley (NYS: MS) . Those looking at this quarter in a vacuum might think Goldman lost its mojo, but it looks more to me like a bump in the road.
If you want to keep a closer watch on Goldman in the quarters to come, be sure to add the stock to your watchlist. And if you don't have a watchlist yet, you can start one up easily (and free!) by clicking here.
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