Goldman Belts Another Homer

Stock trading revenue falls, but everything else goes well.
By Matthew Goldstein ,

Goldman Sachs

(GS) - Get Report

continued Wall Street's winning streak Thursday, reporting a 17% gain in first-quarter earnings, which was much better than expected.

In the quarter, the securities firm earned $1.5 billion, or $2.94 a share, up from $1.2 billion, or $2.36 a share, a year ago. Net revenue totaled $6.4 billion, an 8% gain from a year ago.

Revenue at Goldman rose mainly on the strength of sizable gains in investment banking fees and the trading of bonds and commodities.

Goldman handily bested the expectations of the Wall Street analysts, who had predicted the firm would post a modest decline in earnings. The Thomson Financial consensus estimate had Goldman earning $2.24 a share and taking in $5.4 billion in net revenue.

On the earnings front, it was a clean sweep this week for Wall Street's big four brokerage houses with their quarters ending in February.

Bear Stearns

(BSC)

,

Lehman

(LEH)

,

Morgan Stanley

(MWD)

and Goldman all reported higher first-quarter earnings that surpassed analyst expectations.

Analyst estimates for the brokerage sector often are off target because of the difficulty in determining revenue from proprietary trading -- trades for the firm's own benefit.

Goldman's earnings were fueled by gains in all its main businesses. Net revenue from investment banking rose 17% to $893 million. Trading revenue rose 6% to $4.3 billion. Net revenue from asset management and securities services rose 8% to $1.13 billion.

The firm's bond and commodities trading desk proved the real powerhouse. Fixed-income and commodities trading revenue rose 18% to $2.49 billion. But net revenue from equities-related trading was down 7% to $1.55 billion.

The firm said commodities trading benefited from high volatility in the quarter, while stocks were affected by "low volatility."

The firm's big hedge fund business also powered earnings. Net revenue from securities services were up 35% to $380 million, largely because of "significantly higher customer balances in securities lending and margin lending." Much of that lending is to hedge funds that are customers of Goldman's prime brokerage business.

"The strength of our performance comes from the breadth of our global franchise," said Goldman Chairman and CEO Henry Paulson, in a press release.

In the quarter, Goldman put more of its capital at risk in making trades compared to the fourth quarter of last year. The firm's VAR, the metric used to measure the potential trading loss the firm could in theory lose in a day, was $65 million in the quarter, compared with $57 million at the end of the November quarter. But the VAR was down from a year ago, when it stood at $71 million.

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