Goldman Sachs Group Inc. (GS) - Get Report said second-quarter profit rose 40% thanks to a recovery in its struggling bond-trading division, and that CEO Lloyd Blankfein will step down at the end of September, earlier than planned.
Net income was $2.57 billion, the New York-based bank said Tuesday, July 17, in a statement. Earnings per share were $5.98, beating the average analyst estimate of $4.65 in a FactSet survey.
The firm's shares fell 1.6% in New York trading after the report, as some analysts said Goldman's trading and investment-banking results might not be reliable enough to justify a higher stock valuation.
Brian Kleinhanzl, a banking-industry analyst at the brokerage firm Keefe, Bruyette & Woods, wrote in a report to clients that Goldman's higher-than-expected earnings appear to have stemmed partly from unrepeatable profit drivers, such as market gains in the firm's Investing and Lending business, which owns stakes in hard-to-value assets.
"Investors will not like a beat based on episodic revenue," Kleinhanzl wrote.
Goldman separately announced the timeline for a CEO succession plan that the firm began to implement earlier this year: Blankfein, 63, will retire on Sept. 30, and he'll step down as chairman of the board at the end of the year. As expected, he'll be replaced by Chief Operating Officer David Solomon, who's 56.
The CEO change comes earlier than many investors had expected, following news reports earlier this year that Blankfein might remain at least through the end of 2018.
"Our firm has demonstrated great resiliency and strength over the last 12 years," Blankfein said in a press release. "I've never been more optimistic about our ability to serve our clients effectively and generate industry-leading returns."
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Over the past year, Goldman's shares are down 0.4%, the only major U.S. bank whose shares haven't produced a positive return over the period. Even Wells Fargo & Co. WFC, the scandal-plagued bank, has done better, with a gain of 4%, while those of Goldman's longtime Wall Street rival, Morgan Stanley, have climbed 8.5%.
Goldman Sachs had such an abysmal trading performance last year that some analysts began calling for Blankfein to step aside to make way for the next generation of leaders.
But the second quarter marked the second straight period of outperformance for the bond division, which also includes trading in commodities and foreign exchange.
Net revenue in the division rose 45% from a year earlier to $1.68 billion, in an "environment characterized by higher client activity and improved market-making conditions compared with a challenging second quarter of 2017," according to the statement.
The division's results marked a "meaningful recovery" from the prior year, Gerard Cassidy, an analyst at the brokerage firm RBC Capital Markets, wrote in a note to clients.
The stock-trading unit produced revenue of $1.89 billion, unchanged from a year earlier. Improvement in exchange-traded stocks was offset by a drop in revenue from derivatives, a type of financial contract that's traded over the counter, according to the statement. The results were weaker than expected; Cassidy had projected an increase of 16%.
Investment-banking fees climbed 18% to $2.05 billion, fueled by an uptick in the pace of completed mergers and fees from initial public offerings.
According to the press release, Solomon will also inherit the role of chairman of the board of directors, with Goldman keeping the CEO and chairman's roles combined. Many corporate-governance advocates have pushed for the big U.S. banks to split the roles, to provide greater accountability for top executives.
Bloomberg News reported that Blankfein stands to collect as much as $84.7 million following his departure, from previously awarded stock grants and deferred cash bonuses. A spokesman for the firm told Bloomberg that the awards wouldn't be accelerated upon his retirement.