Updated from 8:56 a.m. EDTWall Street's red-hot bond business helped Goldman Sachs ( GS) navigate bear markets in its other lines of business in the second quarter, leading the company to post a much-better-than-expected increase in earnings. Goldman said Wednesday that it earned $695 million, or $1.36 a share, in the quarter, compared with $563 million, or $1.06 a share, for the prior-year period. Thomson First Call had predicted earnings of $1.19 a share. Nonetheless, Chief Financial Officer David Viniar expressed only muted optimism about the second half of 2003 in a conference call. "Investment-banking backlog is up from the end of the first quarter to the end of the second quarter, and there's a slightly more positive tone in the market. We're a little more optimistic, seeing a bit more activity in business, just a little pickup, but I would emphasize the word 'little,' " he said. Goldman also raised its quarterly dividend to 25 cents from 12 cents, citing the new dividend-tax law and the fact its yield is well below that of rivals. But investors were taking profits on Goldman stock Wednesday, after shares hit an 18-month high of $91.98 a week ago. Also, Goldman investors were a little skittish, as 11 million stock options and 51 million shares are eligible for sale on Thursday. At midday Wednesday, the shares were at $85.92, down 68 cents, or 0.8%, putting the dividend yield at about 1.2%. Bond trading continues to prop up Wall Street's bottom line. Goldman's fixed income, currency and commodities group, also known as FICC, posted net revenue of $1.59 billion during the quarter, up from $1.14 billion a year ago but down 15% sequentially. "In some ways we've finished the half-year with about as good of an environment in FICC as you can get," said Vaniar, noting that tightening credit spreads, declining interest rates, a steep yield curve, volatile currency markets and strong customer demand helped boost bond trading. "We think of FICC as one business line, but it's a broad, complex business. It's extremely hard to predict the rest of the year."
Overall trading and principal investments posted net revenue of $2.00 billion, up from $1.45 billion a year ago, due in no small part to the fact that markets have rallied and investor interest had picked up. "As the markets improved, we saw customers wanting to do things they haven't done in a while, like hedge transactions and do program trades," said Vaniar. "If markets continue to be strong and volume increases, it's likely this business will do better." Almost all of Goldman's other business lines saw contracting year-over-year revenue. Investment banking fell to $659 million from $762 million. Financial advisory fell to $258 million from $428 million. Asset management fell to $404 million from $443 million. Still, the trading gains were still substantial enough to cause overall revenue to rise to $3.99 billion from $3.85 billion. "Although we have yet to see sustained evidence of an economic recovery, stronger recent performance in the capital markets and improved investor sentiment have created a more optimistic outlook for our business," Goldman said.