By Lauren Tara LaCapra
(Reuters) - Goldman Sachs Group Inc's quarterly profit fell 12 percent as investment income plunged, reflecting the pressure the bank faces as demand for its services remains tepid and markets fluctuate wildly.
Goldman was long praised by investors for making savvy bets on markets, and last decade it earned billions of dollars from these trades. But in the second quarter it lost $194 million on its investment in Industrial and Commercial Bank of China Ltd (ICBC) and $112 million on its investment in other stocks.
Revenue for its investing and lending group fell 81 percent overall. The bank has already scaled back its risk-taking, even before new regulations take effect limiting bets with its own money, and in the current market Goldman has grown even more conservative. It announced a new round of cost-cutting, and its shares fell 0.4 percent.
With all this pressure, the bank posted a return on equity - a measure of how effective Goldman is at wringing profit from its balance sheet - of just 5.4 percent for the second quarter. Before the financial crisis, it was routinely above 30 percent.
"We are not going to have an acceptable return on equity in this environment," Goldman's chief financial officer, David Viniar, said on a conference call with investors.
The current economy - with Europe embroiled in a debt crisis, growth slowing in China, and the United States economy limping along - has pushed Goldman to look at more conservative ways to earn money, such as gathering more deposits and making more loans. This traditional commercial banking business would have been anathema to Goldman before the crisis.
A report in The Wall Street Journal said Goldman is building it private bank, and hopes to grow its loan portfolio from $12 billion to $100 billion.
INVESTMENT BANKING REVENUE DOWN
The bank is betting less of its own money in markets, and many customers are wary, too. Fewer companies were buying rivals or selling themselves, and some were reluctant to issue stock, pushing Goldman's overall investment banking revenue down 17 percent in the latest quarter. Equities trading revenue, including commissions, fees, and other services, fell 12 percent.
Bright spots in the results included a 37 percent increase in fixed income, currency and commodity trading revenue, and a rise in the investment banking backlog from the first quarter, suggesting that underwriting and merger advisory revenue may soon climb.
Even with these gains, overall net revenue fell 9 percent. Goldman reduced operating expenses by 8 percent, and cut staffing levels by 100 employees, bringing its headcount to 32,300. The bank has cut staff in five of the past six quarters, with staff down 10 percent since the end of 2010.
Goldman plans to reduce annual costs by another $500 million, in addition to its previously planned $1.4 billion of annual expense reductions.
Overall, Goldman earned $927 million, or $1.78 per share, in the second quarter, down 12 percent from $1.052 billion, or $1.85 per share, a year earlier. Revenue fell to $6.63 billion from $7.28 billion.
Analysts' average earnings forecast was $1.16 per share, according to Thomson Reuters I/B/E/S.
Goldman's earnings per share easily beat Wall Street expectations in part because the bank spent $1.5 billion buying back 14.3 million of its shares during the quarter.
(Reporting By Lauren Tara LaCapra; editing by John Wallace)
