Goldman isn’t yet the envy of Wall Street again

July 16, 2013

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Goldman Sachs isn’t yet the envy of Wall Street again. The investment bank generated $1.9 billion of profit in the second quarter, twice the figure of a year ago and beating the estimates of analysts by a third. Though it sounds like a return to Goldman’s good old days, it hasn’t managed to solidly outpace rivals.

For starters, some of the bottom line was helped by a lower tax rate. In the three months to June, Goldman handed over 27 percent of its pretax profit to governments around the world. That’s about 6 percentage points lower than it has been paying of late. It was the benefit, finance chief Harvey Schwartz told investors on Tuesday, of permanently reinvesting in the business money made outside the United States.

The reduced levies brought in an extra $159 million for shareholders, without which Goldman’s annualized return on equity for the quarter would have dipped from 10.5 percent to 9.6 percent, or just below the rule-of-thumb estimate for a big bank’s cost of capital.

Investing and lending also contributed a decent slug of revenue. At $1.4 billion, the sum was 32 percent below that of the first quarter, but still seven times what it was a year ago. That’s great – for now. It may be tough to duplicate, though, and not just because investments in debt and private equity are lumpy. The Volcker Rule will prohibit banks from devoting more than 3 percent of capital to such pursuits.

Goldman’s efforts elsewhere were mostly decent enough. Asset management revenue was flat at $1.3 billion, but isn’t the firm’s strongest division. Sales of stocks and bonds were solid, with underwriting fees jumping 45 percent from a year ago. And traders of fixed income, currencies and commodities reaped $2.5 billion of revenue, mostly avoiding the macroeconomic and central-banker induced effects that stung smaller rival Jefferies.

None of it, however, was markedly better than the performance of the folks at Citigroup and JPMorgan. In some areas, the competitors even held up stronger. Goldman is accustomed to being far ahead of the pack. For now, though, it is only distinctly better than it had been, not the best.

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