By Sudarshan Varadhan and Olivia Oran
(Reuters) - Goldman Sachs Group Inc's (N:GS) quarterly profit fell by more than half and revenue slumped to its lowest in more than four years as market volatility hit the Wall Street bank's bond trading and investment banking businesses.
Goldman, wrapping up a dismal quarter for big U.S. banks, reported a 40 percent drop in net revenue, reflecting declines in all of its main businesses.
As with other banks, Goldman's trading revenue was hit by sliding commodity and oil prices, worries about the Chinese economy and uncertainty about U.S. interest rates.
Highlighting the challenges facing the bank, Goldman's return on average common equity - a measure of how well the bank uses shareholder money - was 6.4 percent in the quarter, down from 14.7 percent a year earlier.
Many investors think ROE should be at least 10 percent to cover the cost of capital.
Goldman, whose shares were up 2.2 percent at $162.42 in morning trading on Tuesday, said its revenue from trading bonds, currencies and commodities (FICC) fell about 47 percent. Equities trading revenue, normally a strength, slid 23 percent.
FICC accounted for 26.2 percent of total revenue in the quarter - a far cry from the 40 percent the business regularly contributed before the financial crisis.
"The market was braced for a weak quarter, but we think the breadth of weakness on the top line will be a disappointment as people try to grapple with the timing of the recovery," Evercore ISI analyst Glenn Schorr wrote in a client note.
Goldman's traditional rival, Morgan Stanley (N:MS), reported a 54 percent drop in adjusted revenue from fixed income and commodities trading and a similar drop in net profit. Its equities trading revenue fell 9.3 percent.
Goldman reported a 56.3 percent fall in net income applicable to common shareholders to $1.2 billion, or $2.68 per share, for the three months ended March 31. That compared with $2.75 billion, or $5.94 per share, a year earlier, when the bank recorded its best quarterly profit in five years.
Analysts on average had expected earnings of $2.45 per share, according to Thomson Reuters I/B/E/S.
Net revenue fell to $6.34 billion from $10.62 billion.
Still, Chief Financial Officer Harvey Schwartz express some optimism about market conditions in the current quarter.
"Although the market seems fragile ... it feels like factors impacting the markets in the first quarter have abated," Schwartz said on a call with analysts, adding that the bank would "do what it takes" to maximize returns for shareholders.
COMPENSATION COSTS DROP
Goldman's investment banking revenue, which includes income from advising on deals and underwriting bond and share offerings, fell 23.2 percent to $1.46 billion in the quarter.
Goldman, like its rivals, has been cutting costs to make up for weak revenue.
Compensation costs fell 40.3 percent to $2.66 billion in the latest quarter. Operating costs fell 28.7 percent to $4.76 billion as employee compensation costs dropped about 40 percent.
Non-compensation costs fell 5.6 percent to $2.1 billion, the lowest in seven years, as a result of lower provisions for litigation and other regulatory matters.
Goldman Sachs, JPMorgan Chase & Co (N:JPM), Bank of America Corp (N:BAC) and Morgan Stanley together have cut nearly $4 billion in compensation costs since the first quarter of 2015, according to Reuters calculations.
Up to Monday's close, Goldman's shares had fallen about 12 percent since the start of the year, making the stock the worst performer in the Dow Jones industrial average (DJI).