NEW YORK — Goldman Sachs had an 83 percent drop in second-quarter net income but still got a vote of confidence from investors.
Goldman Sachs Group Inc. said Tuesday its earnings fell to $453 million as trading revenue dropped during a dismal spring for the financial markets. The bank also booked a $550 million charge for its settlement of civil fraud charges with the Securities and Exchange Commission and took a $600 million charge because of a new tax on employee bonuses in Britain.
Investors initially sold Goldman's stock after its earnings were released, but they had a change of heart as the trading day wore on. Analysts said investors focused on the fact that Goldman is still the top player on Wall Street and will remain so in the future when the markets recover from their current slump.
"These guys are the best of breed," said John Jay, a senior analyst at Aite Group. "Their relationships are still in place. In the end, this is just a temporary swoon."
Goldman's stock rose $2.72, or 1.9 percent, to $148.80 in afternoon trading.
The stock is still down more than 20 percent from its close on April 15, the day before the SEC charges were filed. Last week, the government Goldman announced a $550 million settlement of those charges, which grew out of the 2007 sale of complex mortgage-related securities.
The fact that Goldman took a charge for the settlement in the second quarter showed that the bank expects to put the case behind it. Chief financial officer David Viniar said during a conference call with reporters that the bank did not see any drop in market share because of the charges, which grew out of the company's sale of complex mortgage-related securities in 2007.
The other big charge grew out of a one-time British tax of 50 percent on bonuses for banking employees in excess of $38,000.
Excluding the one-time costs, net income after payment of dividends on preferred stock came to $2.75 per share, easily topping the $2.08 analysts forecast. Analysts typically exclude one-time charges from their estimates.
Revenue fell 36 percent to $8.84 billion, short of the $8.94 billion predicted by analysts.
Goldman's revenue from trading stocks and other securities fell along with that of competitors including JPMorgan Chase & Co. and Bank of America Corp. All were hit hard by the markets' spring plunge. Goldman was also hurt by its lack of a retail banking business. JPMorgan and Citigroup Inc. were both able to release money from their reserves to cover failed loans including mortgages. That offset some of their trading losses.
Investors have been concerned about the impact that new federal regulations will have on banks' ability to profit from trading. Viniar said during the call with reporters that there is no way yet to estimate the impact of the new regulations on revenue or profits. He said it could take more than a year as the detailed regulations are written before Goldman can assess their potential impact.
New York-based Goldman, considered the strongest of the big investment banks, said its trading revenue dropped 39 percent to $6.55 billion.
Goldman historically has had revenue from its bond, currency and commodities trading business that beat analysts' forecasts. Now, those revenues are slipping as market volatility replaced the steady gains seen through most of 2009 and earlier this year.
"This was really driven by a lack of activity by our clients," Viniar said. Market volatility in the second quarter and concerns about financial regulation and mounting government debts in Europe kept many customers out of the market, he said.
He warned that if customers are still nervous about the markets, revenue and earnings could remain low in the coming quarters.
When asked about potential third-quarter results, Viniar said, "I don't make predictions." He did say, however, that at this moment the "business environment is pretty slow."
Stocks climbed to their highest levels of the year in late April before plunging on concerns about mounting government debt in Europe and signs the U.S. economy was slowing. Investors cut back their trading because of that drop, wanting to avoid further losses.
Analysts say weakness in the broader economy remains a problem. Alan Villalon, a senior research analyst at First American Funds, said, "Where are they (banks) going to grow with the economy we have?"
Goldman said revenue from trading of bonds, currencies and commodities fell 35 percent from a year earlier, while revenue from stock trading dropped 62 percent. During the second quarter of 2009, the markets were soaring as they recovered from the financial crisis. But during this latest quarter, the Standard & Poor's 500 stock index fell almost 12 percent.
With the added market turbulence, Goldman's corporate customers were also issuing fewer bonds and shares of stock. That hurt the bank's investment banking business during the quarter. Revenue in that unit fell 36 percent to $917 million.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, said that while the SEC case might have somewhat tarnished Goldman's image as the top bank on Wall Street, it "did little to dissuade clients from doing business with them."
"Goldman Sachs is considered to be the pre-eminent investment bank," Luschini said.
The company reported that its costs for employee compensation and benefits came to 43 percent of its net revenues during the first half of the year. That compares with 49 percent in the first half of 2009. Goldman has been sharply criticized over the past year because of the huge bonuses it gave its employees while it accepted government bailout funds in 2008.