Goldman Sachs beats estimates on investment banking, debt gains

Goldman Sachs Group Inc. (NYSE:GS) said earnings doubled, beating analysts’ estimates on a surge in underwriting revenue and gains from the firm’s own investments.

Second-quarter net income rose to $1.93 billion, or $3.70 a share, from $962 million, or $1.78, a year earlier, the New York-based company said today in a statement. That beat the $2.89 average estimate of 27 analysts in a Bloomberg survey.

Gains from the firm’s debt investments almost tripled and fixed-income trading climbed 12% as Chief Executive Officer Lloyd C. Blankfein, 58, led Goldman Sachs through a drop in bond prices sparked by indications in May that the Federal Reserve may ease economic-stimulus measures. The bank has said it will benefit from a rebound in the U.S. economy and $1.9 billion in expense cuts completed last year.

“In a recovering economy, investment-banking picks back up and fixed income doesn’t drop off a cliff,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., said in a Bloomberg Radio interview before the results were announced. “With Goldman, you should be at a point where you’re going to get the expansion in investment banking.”

Investment-banking revenue jumped 29% to $1.55 billion in the quarter, led by record debt underwriting fees. The firm had $3.12 billion of revenue from that business in the first half, the most since 2007.

Overall revenue rose 30% to $8.61 billion. Compensation, the firm’s biggest expense, increased 27% to $3.7 billion and amounted to 43% of revenue for the quarter, down from 44% a year earlier. The ratio was 38% for all of 2012.

Noticeable Improvement

“While the operating environment has shown noticeable signs of improvement, we continue to put a premium on disciplined risk management, particularly in regard to the firm’s strong capital and liquidity levels,” Blankfein said in the statement.

Goldman reported a return on equity of 10.5% in the quarter, up from 5.4% in the year-earlier period. The bank repurchased $1.6 billion shares during the quarter.

“We view this as the company slowly clawing its way back to a normalized ROTCE via the stabilization in markets combined with share repurchases,” Chris Kotowski, an Oppenheimer & Co. analyst, wrote today in a report, referring to return on tangible common equity, a measure of profitability.

Goldman Sachs rose 0.1% to $163.22 at 9:33 a.m. in New York. The stock gained 28% this year through yesterday after advancing 41% in 2012. The shares are still below their pre-crisis peak of $247.92 on Oct. 31, 2007.

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