Goldman Sachs Swings to Profit on Fixed-Income Trading

on Oct 17, 2012

Goldman Sachs (NYSE:GS), the fifth-biggest US bank by assets, reported profit that exceeded analysts’ estimates as fixed-income trading rebounded and investments gained in value. Although recovering revenues and swinging back to profit in the third quarter of the year, the investment bank warned that global activity in markets and deal-making remains subdued, The Financial Times reported on 16 October 2012.

**Goldman Beats Q3 Profit Estimates**
According to its quarterly earnings report, Goldman Sachs returned to profitability in the three months to September year on year. The New York-based bank more than doubled its total net revenues, to $8.35 billion (£5.17 billion), helping boost net income to $1.46 billion (£905 million), set against a loss of $428 million (£265 million) in the same period last year. The profit rise equated to $2.85 per share, compared to a loss of 84 cents a year earlier.

Goldman Sachs’s quarterly earnings did not just help the bank bounce back from a loss in the same period a year ago, but also beat analysts’ expectations. The average estimate of 25 experts surveyed by Bloomberg was $2.28 per share, while analysts polled by Thomson Reuters were even more sceptical predicting earnings of $2.12 per share.
!m[Despite Recovering Profitably Global Markets Activity Remains Subdued, the Bank Says](/uploads/story/591/thumbs/pic1_inline.png)Goldman Sachs’ chairman and CEO Lloyd C. Blankfein said: “This quarter’s performance was generally solid in the context of a still challenging economic environment. We continue to be disciplined in managing our operations and capital, while effectively serving our clients’ needs. The focus on these priorities will serve our shareholders and the firm well over the longer term.”

**Debt Trading Boosts the Company’s Earnings**
Goldman Sachs posted the stronger than expected earnings after buoyant bond markets helped its investment banking and trading divisions, and higher asset prices helped inflate the market value of its “investing and lending” portfolio.
Net revenues in investment banking jumped 49 per cent to $1.16 billion (£719 million), while income from “fixed income, currency and commodities” – where the bank trades bonds, currencies, commodities and interest rates on behalf of clients – jumped 28 per cent to $2.22 billion (£1.37 billion) in the period.

**Stock Trading Slides**
During the third quarter of 2012, Goldman Sachs’s share trading revenue fell 16 per cent to $1.96 billion (£1.21 billion) from a year earlier. Yet compared to the prior quarter, stock trading revenue is up 16 per cent. Meanwhile, the return on equity – a key measure of a company’s ability to generate profits from shareholders’ money – was 8.6 per cent in the period. That is an improvement from the 5.4 per cent Goldman reported in the same period last year, but still a far cry from levels of more than 30 per cent just before the financial crisis.

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**Goldman Remains “Pretty Defensive”**
Goldman’s incoming chief financial officer Harvey Schwartz said that the bank would keep its risk appetite at its current low level until client confidence returned, which he said had not been the case in the first weeks of the fourth quarter. Goldman Sachs’s daily “value-at-risk”, a measure of the firm’s potential daily trading losses, fell to $81 million in the third quarter, showing the lowest risk appetite since the fourth quarter of 2005.
“So far it has largely been more of the same,” Schwartz said, adding that “it is still a market environment where we are remaining pretty defensive”.

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