Goldman Sachs Tops Estimates

Shares opened higher.
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Goldman Sachs

(GS) - Get Report

posted fourth-quarter earnings that easily beat analysts' estimates, helped by strong investment-banking activity and growth in equities trading.

The New York investment bank earned $3.22 billion, or $7.01 a share, in the latest quarter, on revenue of $10.74 billion. A year ago, Goldman earned $3.15 billion, or $6.59 a share, and had revenue of $9.41 billion.

Revenue did decline, however, by 13% from $12.33 billion in the fiscal third quarter.

Analysts surveyed by Thomson Financial were looking for a profit of $6.61 a share and a top line of $10.16 billion in the latest quarter.

For the full year, Goldman made $11.4 billion, or $24.73 a share, an increase of 21% when compared with $9.4 billion, or $19.69 a share in 2006. Total net revenue for the full year rose 22% to $45.9 billion.

"Inherent in our commitment to our clients is the need to help them execute their transactions in all market conditions and, as a result, we are ever mindful of the importance of effective risk management," said Goldman Chairman and CEO Lloyd Blankfein. "Looking forward, we continue to see significant growth opportunities across the global economy."

Goldman Sachs: Not Just a Hedge Fund

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As the golden boy on Wall Street, Goldman has been one of few firms to shine despite credit market turbulence this year. It has avoided the mega-writedowns from leveraged loans and collateralized debt obligations, or CDOs, that other brokerage firms have suffered.

Goldman said more than half of its pretax earnings were produced outside the U.S.

Investment banking surged 47% in the fourth quarter to $1.97 billion. Goldman attributed the increase to strong client activity in M&A advisory, which more than doubled from a year earlier to $1.24 billion.

Goldman's underwriting business posted revenue of $733 million, essentially unchanged from the year-earlier period. The company said that equity underwriting revenue rose 22% because of an increase in initial public offerings, but debt underwriting results fell 15% from a decrease in leveraged finance and mortgage-related activity, reflecting "challenging market conditions" from the ongoing credit crunch.

Trading and principal investments rose 4% from a year earlier but fell 16% from the third quarter to $6.93 billion.

Equities trading surged 22% in the quarter to $2.59 billion, while its fixed-income commodities and currencies business inched 6% higher to $3.3 billion, reflecting "significantly higher net revenues in currencies and commodities," the company said.

While revenue in mortgages and interest rate products rose, credit products "declined significantly" in the fourth quarter, reflecting lower results from equity investments, it was partially offset by a $500 million gain from "non-investment grade credit origination activities," Goldman said.

"During the quarter, while customer-driven activity was generally solid, FICC operated in a challenging environment characterized by continued deterioration in the mortgage market and weakness in the corporate credit market," it said.

Total principal investments dropped 26% to $1.03 billion.

Goldman's so-called VaR, or value at risk, totaled $151 million in the fourth quarter. The VaR calculates how much money a firm could lose in one day of trading if all bets were against it. In other words, it's a measurement of how much money a firm is willing to gamble on its proprietary traders.

Last week

Lehman Brothers

(LEH)

reported profit fell 12% to $886 million, or $1.54 a share. Still, Lehman managed to beat analysts' estimates by 12 cents.

While Lehman's capital markets business dropped 10% to $2.7 billion in the quarter, and fixed-income revenue plunged 60% to $860 million, the company was largely able to offset its $3.5 billion in writedowns.

Lehman through a $2 billion gain on hedge which, coupled with $600 million in gains of sale of leverage loans and other securities, took a net writedown of $830 million.

Two other Wall Street banks --

Morgan Stanley

(MS) - Get Report

and

Bear Stearns

(BSC)

-- are expected to report earnings Wednesday and Thursday respectively.

Shares of Goldman were up 39 cents to $209.02 in early trading Tuesday.