For Goldman Sachs Status Quo Is Too 'Comfortable' (Correct)

Corrected from from 1:15 p.m. ET to reflect Goldman CFO name and closing share prices.

NEW YORK ( TheStreet) -- Goldman Sachs ( GS) is decidedly "comfortable" with its better-than-forecast second-quarter earnings, however, the results may give way to more questions than answers on the sustainability of the investment bank's current standing.

As with the first quarter of 2013, much of the bank's Tuesday earnings beat was attributable to businesses such as private equity investments and debt trading that investors expect to be challenged in coming years, as interest rates normalize and new regulations kick in.

The nation's pre-eminent investment bank was also unwilling to speak in detail about where it stands in relation to a minimum 5% Basel III supplimentary Tier 1 leverage ratio proposed by Federal Deposit Insurance Corporation.

On a conference call with investors, Goldman's newly appointed chief financial officer Harvey Schwartz repeatedly said the firm was "comfortable" with its capital position and leverage ratios. Analysts, however, pressed for more specific disclosure.

At one point, Schwartz defined Goldman's definition of "comfortable" to Morgan Stanley analyst Betsy Graseck as "comfortable," in a war of words similar to one featured in JPMorgan's ( JPM) earnings conference call on Friday.

"I think the word of the day is comfortable," Mike Mayo, a banking analyst at CLSA, said on the call.

Given Goldman's trouble in getting the Federal Reserve to approve its plans to return capital to investors followng March stress tests, the investment bank's capital position and leverage was the biggest point of questioning from analysts.

CFO Schwartz pointed to Goldman's balance sheet deleveraging in the wake of the financial crisis and its rising capital ratio's under Basel I and Basel III guidelines as signs of the bank's improving financial position.

While Schwartz also stressed to Goldman's consistent ability to meet new post-crisis rules, he wouldn't disclose the banks' standing under advanced Basel III guidelines or the new proposed leverage capital rules.

Goldman will provide additional detail on its Basel III capital ratios and leverage under the FDIC's proposed guidelines when the firm has had time to come up with exact numbers, Schwartz said. He did note a changing characterization of assets under the FDIC's proposed guidelines such as cleared OTC derivatives and custody assets could alter projected leverage ratios to Goldman's benefit.

The bank could see a boost if it can provide clarity to investors on its capital relative to new regulation, especially given Schwartz's confidence. "I generally kind of accept his answers, although I know it frustrated folks out there," Marty Mosby, a banking analyst at Guggenheim Securities, said of Schwartz's comments on the investor call.

For now, Goldman is simply telling investors it is "comfortable." According to most analyst projections, only Wells Fargo ( WFC) currently has sufficient capital to meet the FDIC's proposed leverage ratio requirements.

If analysts appeared unimpressed with Goldman's discussion of its balance sheet, the bank's better-than-forecast earnings may also prove a point of concern.

Goldman reported a second-quarter profit of $1.93 billion, on revenue of $8.61 billion, beating adjusted estimates of $1.48 billion and $7.97 billion, respectively.

Adjusted earnings per share of $3.70 beat an estimate of $2.89 a share, according to analyst forecasts compiled by Bloomberg.

While Goldman's earnings continue to beat Wall Street's expectations, investors will be looking for better earnings from the bank's equities and investment management businesses in coming quarters.

"Generally it was fine," Guggenheim's Mosby said of Goldman's earnings beat.

The analyst noted Goldman's fixed income revenues were resilient to rising interest rates over the quarter and may indicate a focus in the bank's trading division on customer flows over proprietary bets.

"I would have liked to have seen more investment banking revenues," Mosby added.

Goldman's equity underwriting unit saw revenue drop 5% to $371 million in the second quarter, missing consensus estimates. Quarterly merger advisory fees of $486 million also indicated lackluster growth. Goldman's overall investment banking revenue was stabilized by record debt underwriting revenue of $695 million.

The bank's GSAM investment management unit, meanwhile, posted flat revenue from year-ago levels, at $1.33 billion. Competitors such as Wells Fargo ( WFC) and Morgan Stanley ( MS) are gaining market share in investment management just as many expect investors to return to equity markets.

Goldman did report a 9% quarterly rise in equity trading revenue to $1.85 billion, and continues to earn the most revenue on Wall Street from the business.

Goldman's earnings beat was mostly attributable to $1.42 billion in revenue posted by its Investing & Lending unit, driven by rising marks to the bank's private equity investments and its portfolio of equity and debt market securities.

As regulators work to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, Goldman will not be able to continue relying on its private equity and securities investments to such a great degree. Consensus among Wall Street analysts was for Goldman to see such earnings come in below $900 million, according to data compiled by Bloomberg.

The bank was also able to post a new record in debt underwriting revenue, even amid an end-of-quarter surge in interest rates that drove the worst quarterly bond market performance since 1994.

Factors such as asset sales and a falling tax rate also played into earnings.

"The beat was primarily driven by investment gains in the Investing & Lending division, a lower than expected tax rate and a slight beat on investent banking fees," Richard Staite, an Atlantic Equities banking analyst, wrote in a note reacting to earnings.

Goldman Sachs shares fell over 1.5% in Tuesday trading, closing at $160.24.

-- Written by Antoine Gara in New York

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