Goldman Sachs Profit Climbs as Trading Revenue Surges

By LIZ HOFFMAN for the Wall Street Journal.

Goldman Sachs Group Inc. said its quarterly earnings rose 47% as the firm continues to rebound from a slow start to the year.

The New York-based firm reported a profit of $2.09 billion, or $4.88 a share. That compares with $1.43 billion, or $2.90 a share, in the same period last year.

Revenue grew to $8.17 billion from $6.86 billion a year earlier, when sluggish trading activity across Wall Street—particularly in fixed-income, where Goldman is strongest—dragged down earnings.

Shares climbed 1.4% premarket.

“We saw solid performance across the franchise that helped counter typical seasonal weakness,” Chief Executive Lloyd Blankfein said in prepared remarks. “We continue to manage our balance sheet conservatively and are benefiting from the breadth of our offerings to clients.”

Goldman’s return on equity, a closely watched measure of profitability, stood at 11.2% in the third quarter. It was 7% in the year-earlier quarter and hadn’t exceeded 10%—the firm’ theoretical cost of capital—since early 2015.

Investors’ expectations of a strong quarter built in recent days after rivals including J.P. Morgan Chase & Co. and Citigroup Inc. reported big boosts in their trading businesses.

Goldman’s trading revenue increased 17% to $3.75 billion from $3.21 billion in the same quarter last year. That was driven largely by a 34% increase in revenue from fixed income, currency and commodities trading. Meanwhile, equities trading revenue edged up 2%.

The bank gets the biggest chunk of its revenue from trading, where it buys and sells stocks, bonds, currencies and other instruments on behalf of investing clients.

Goldman shares are up 14% since the end of the second quarter but remain down 6.2% year to date, worse than a 2.9% decline in the KBW Nasdaq Bank index.

The New York firm is more reliant than many of its rivals on trading, which typically makes up half the firmwide revenue. Goldman has been disproportionately bruised by the volatility and overall decline in trading activity since the financial crisis.

Investment banking revenue, which include merger advisory and underwriting fees, fell 1.2% to $1.54 billion from $1.56 billion in the third quarter of 2015.

Revenue from Goldman’s investment-and-lending arm, a collection of debt and equity holdings, more than doubled to $1.4 billion from $670 million a year prior. That business tends to swing wildly as positions are marked to market, and began 2016 with its worst quarter in five years.

The firm’s investment management arm, which oversees money for pension funds and other big institutional investors, posted revenue of $1.49 billion, up 4.4% from $1.42 billion last year. It has seen inflows over the past year, a rarity among active managers as investors shift toward passive strategies.

Despite Goldman’s recent push into consumer-facing businesses, such as offering savings accounts and online loans, the firm still relies heavily on its investment banking and trading businesses.

Skittish clients, reduced volatility and quieter IPO markets have dinged those divisions over the past year. In response, Goldman has shed several hundred jobs this year, including traders in New York and London and investment bankers in Asia.