Goldman Sachs shares rise as earnings blow past the Street on the best trading results in years

Goldman Sachs on Wednesday reported blowout second-quarter earnings as its reliance on trading and investment banking paid off amid the market turbulence caused by the coronavirus pandemic.

The bank said it generated $2.42 billion in profit, or $6.26 a share, crushing the $3.78 a share estimate of analysts surveyed by Refinitiv. It was the New York-based bank's biggest earnings outperformance in nearly a decade. 

Revenue of $13.3 billion was more than $3.5 billion higher than the estimate, fueled by strong results in its trading and investment banking divisions, which made up three-quarters of the firm's revenue in the period. 

Goldman shares climbed 1.5%, moderating earlier gains of 5.5%, after management said that trading activity had slowed down in recent weeks. 

"While the economic outlook remains uncertain, I am confident that we will continue to be the firm of choice for clients around the world," CEO David Solomon said in the release. 

Goldman is the closest approximation to a pure-play Wall Street bank that remains among the largest U.S. lenders, and that set it up well for the first half of 2020. Of the six biggest banks, Goldman gets the largest share of its revenue from Wall Street activities including trading and investment banking. For the past few years that has been a detriment to the firm, as retail banking fueled by cheap consumer deposits has driven the industry's record profits.

Now, with retail banks setting aside billions of dollars for loan losses tied to the pandemic, Goldman's model looks like a distinct advantage.

The pandemic caused surging volatility across asset classes starting in March, conditions that spurred institutional investors to place bets or hedge against losses. The Federal Reserve's unprecedented actions to prop up credit markets helped bond trading as well and opened up debt markets for even riskier corporations to sell bonds and issue equity at a furious pace, leading to record investment banking fees. 

All of that helped Goldman. Three of the bank's four main divisions produced more second-quarter revenue than a year earlier.

"Goldman's earnings this quarter were too good — almost indecent, in fact," said Octavio Marenzi, CEO of capital markets consultancy Opimas. "The Fed has been able to engineer a huge bounce-back in the markets by injecting trillions of dollars, benefiting investment banks primarily."

Bond trading revenue surged almost 150% to $4.24 billion, and equities trading revenue rose 46% to $2.94 billion. Together, the trading division produced roughly $2.5 billion more than analysts had expected. Investment banking revenue climbed 36% to $2.66 billion, about $550 million more than expected.

The spread between what buyers and sellers were willing to accept on trades generally widened in the quarter, benefiting Goldman, CFO Stephen Scherr told analysts on Wednesday. Investments in electronic trading platforms also continued to pay off, helping the bank gain market share, he said.

Expectations for Solomon's bank were running high after JPMorgan Chase and Citigroup posted strong trading and advisory results that helped the banks beat profit estimates for the second quarter. At JPMorgan, markets revenue jumped by 79% to a record $9.7 billion.

It's likely that trading revenue will slow down in the back half of 2020, a typical annual pattern for traders. In the post-financial crisis era, investors have given a lower valuation multiple to trading businesses because of the volatile nature of earnings – traders can earn money hand over fist sometimes, only to see conditions abruptly change. JPMorgan executives said Tuesday they expected the red-hot area to cool off. 

Solomon told analysts that while trading activity has slowed down in recent weeks, it was still at an elevated level. 

Goldman's asset management division fared less well. Revenue fell 18% to $2.1 billion, dinged by lower gains from private equity holdings, which was only partially offset by higher gains in the shares of public companies. 

In the bank's relatively new consumer and wealth management division, revenue climbed 9% to $1.36 billion, fueled by higher management fees and loans from the firm's Apple Card partnership.

It also said it set aside another $1.59 billion for potential credit losses due to the coronavirus.

Goldman shares were down 7% this year through Tuesday's close, compared with the 36% decline of the KBW Bank Index.

Here's a list of the bank's milestones for the quarter:

• Revenue of $13.3 billion was the second-highest ever for the firm and up 41% from a year earlier.
• Fixed income trading revenue came in at $4.24 billion, the highest in nine years.
• Equities trading revenue was $2.94 billion, the best quarter in 11 years.
• Investment banking revenue was a record $2.66 billion.

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