NEW YORK — Goldman Sachs Group Inc. said Tuesday its second-quarter net income dropped 83 percent to $453 million as trading revenue fell and the bank booked a charge for its settlement of civil fraud charges with the Securities and Exchange Commission.
The company's revenue fell short of expectations, following IBM Corp. and Texas Instruments Inc., which late Monday reported revenue that disappointed investors.
Goldman's stock initially fell sharply after the earnings release but recovered by late morning and rose 39 cents to $146.07. Investors may have been reassured by the fact that the drop in Goldman's revenue, like that of other big banks, has fallen because of volatile financial markets, not because of a slowing economy.
Goldman took a $550 million charge to cover the cost of the settlement with the SEC that was announced last week. Goldman's 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.
Earnings were also reduced by a one-time, $600 million charge tied to a new tax on bonuses in Britain.
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 spring plunge in the stock market. 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.
Goldman had no such alternatives to help its earnings, said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
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."
Analysts say weakness in the broader economy remains a problem. Economic indicators point toward a continued slowdown, which could keep customers and institutions from trading.
Alan Villalon, a senior research analyst at First American Funds, said, "Where are they (banks) going to grow with the economy we have?"
The company said its 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 first three months 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.
By taking a charge for the SEC settlement in the second quarter, Goldman was attempting to put the entire case behind it. The government had filed civil fraud charges in connection with Goldman's sale of complex mortgage-related securities.
Viniar reiterated that the SEC has completed a review of other mortgage-related transactions and does not plan to bring any charges against the bank or its employees for those deals.
The $550 settlement includes $300 million in fines to be paid to the government and $250 million to compensate two European banks that lost money on their investments.
Janney Montgomery Scott's Luschini 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.
