Once-mighty Goldman Sachs reports another tough quarter

NEW YORK -- Another tough quarter, another reminder for Goldman Sachs that it's not just its reputation that's under attack.

The once-mighty investment bank's revenue and earnings continue to decline even as it has resorted to massive job cuts and other steps to reduce costs in the past year.

On Tuesday, the New York bank said its net income in the April-through-June period fell 11 per cent to US$962 million, or $1.78 per share. That compares with $1.09 billion, or $1.85 per share, a year ago. The earnings were higher than the $1.17 per share that analysts were expecting, and Goldman's stock edged up 19 cents, to $97.87.

Revenue fell 9 per cent to $6.63 billion compared with the same period a year ago.

Goldman's CEO Lloyd Blankfein blamed the declines on market volatility, which was set off by instability in Europe's financial system, and the global economic slowdown.

However, Goldman's problems run deeper. The bank is struggling to navigate a world of stricter government controls that is drying up some of its most lucrative revenue streams. Regulations taking effect this year reduce Goldman's ability to trade for its own account, which has previously been a big source of profits, especially when markets are unsettled.

The problem with Goldman is that, unlike its other Wall Street rivals, it cannot rely on traditional banking businesses to reduce that pressure. JPMorgan Chase and Bank of America have large bases of consumer deposits, which they can use for making loans to homeowners, businesses and credit card users. Morgan Stanley also owns a large retail brokerage Smith Barney.

So, Goldman is starting to expand its private banking business by lending money to its corporate clients and wealthy individuals. Though such loans may come with relatively low margins, it is another way for Goldman to make up some of the revenue it is losing elsewhere.

David Viniar, the bank's chief financial officer, told analysts in a conference call that Goldman Sachs has been in the private banking business for some time. The Wall Street Journal published a story Tuesday describing Goldman's build-up of that business.

"I don't think there is any big change in our strategy," Viniar said in a conference call with analysts. "The bank has just made that a more efficient, more profitable business. So we intend to continue to grow that slowly."

Viniar said Goldman is extending loans to corporate clients from this private bank because a lot of companies need the money at a time when European banks have pulled back.

Viniar also said Goldman will not become a full service consumer bank. He said Goldman would stick to taking deposits from the companies it services and giving out loans to its clients.

"We're raising deposits and we'll use some of those deposits for private individual loans some for corporate loans, but we're not a retail bank we don't have branches, we're not going to bring in a trillion dollars of deposits," Viniar said.

He said Goldman's private bank has a little over $100 billion in assets and $50 billion in deposits. That's about a tenth the size of Goldman's overall assets of $950 billion.

Though Viniar tried to diminish the significance of the private bank, its size could rival that of the U.S.' 18th largest bank, Fifth Third Bank, which has assets totalling around $116 billion.

Goldman would prefer to keep a low profile. It is also keeping its compensation costs in line. The bank has been targeted by protesters and Congress for outsized pay in years past.

Goldman's compensation costs fell 9 per cent in the quarter to $2.9 billion, in line with the drop in revenue.

Global financial markets reeled in the second quarter after the outcome of elections in Greece seemed to push the country closer to defaulting on its debt and Spain's banks teetered on the brink of collapse -- the latest threats to Europe's currency union.

The shakiness in financial markets hurt Goldman's core investment banking business. Goldman is a major adviser to large companies on making merger and acquisition deals and on underwriting stock and bond offerings. Many companies shied away from doing both in the second quarter as they waited for calmer markets.

Barclays analyst Roger Freeman wasn't impressed with Goldman's results. In a note to clients, Freeman advised investors to maintain a "wait and see" approach on the stock.

Revenue in Goldman's investment banking division fell 17 per cent to $1.2 billion; mergers and acquisitions fell 26 per cent and underwriting revenue fell 9 per cent.

Goldman Sachs also helps execute large stock and bond trades for money managers like pensions, mutual funds and hedge funds. Revenue for that business increased 11 per cent from the same period last year, but dropped 32 per cent from the first three months of the year.

With interest rates at historic lows, more people are buying homes or refinancing existing mortgages. These loans are usually securitized and sold on Wall Street. That activity led to a 37 per cent increase in revenue from trading securities related to mortgages and commodities, the bank said.

The decline in global stock markets in the last three months also hurt Goldman's investments in its private equity business. They included a loss of $194 million from the firm's investment in the stock of Industrial and Commercial Bank of China Limited and net losses of $112 million from other stock investments.