By Catherine Ngai and Aparajita Saxena
(Reuters) - Goldman Sachs Group Inc (NYSE:GS) on Wednesday reported a sharp drop in trading revenue that renewed questions about its ability to revive a moribund profit driver or find business to replace it, sending shares down 3 percent.
The Wall Street bank posted its first quarterly loss in six years due to huge but anticipated one-time tax charges. While its adjusted profit beat analyst expectations, Goldman struggled more than rivals during a widespread trading slowdown.
Low volatility has crimped trading revenue across Wall Street for years, but Goldman has borne the brunt of that slump due to the type of customers it caters to, and because it had been more reliant on trading than other banks.
Goldman's bond trading unit posted its worst quarter since 2008, with a 50 percent revenue plunge. The declines were widespread across currencies, credit products, interest rate products, commodities and mortgages, Goldman said.
Equities trading fell 14 percent, even as global stock markets soared. Goldman's customers, mostly active investors like hedge funds, did not transact very much as volatility hovered near historic lows.
Goldman executives laid out a goal last year to generate $5 billion in revenue from fresh sources, including consumer banking, but some investors and analysts remain skeptical about the plan.
Seven of 11 analysts on a conference call with Chief Financial Officer Marty Chavez asked him why bond trading was so weak and when it will recover. Strong performance in other businesses may not be enough to ease investors' concerns, since Goldman's drop in bond trading revenue was so sharp and so much worse than rivals, Evercore ISI analyst Glenn Schorr wrote in a note to clients.
"Usually investors would be happy to see trading a smaller piece of the pie and investment banking growing to the sky, but (bond trading) was so soft," he wrote. "People don't have confidence about if and when it'll turn."
Shares of Goldman, the fifth-largest U.S. bank, fell 3.3 percent to $249.90 in morning trading.
Overall, the bank posted a net fourth-quarter loss of $2.1 billion, or $5.51 per share, and took a $4.4 billion charge related to sweeping U.S. tax law changes.
All other U.S. banks had to make big one-time adjustments to account for the new tax code, but lower corporate tax rates should provide a boon for future bank profits.
Excluding that charge and other one-time items, Goldman recorded earnings per share of $5.68. Analysts expected $4.91 cents per share, according to Thomson Reuters I/B/E/S estimate.
Revenue fell 4.1 percent to $7.83 billion, but beat the average estimate of $7.61 billion. Total operating expenses fell 1 percent to $4.73 billion.
Earnings per share were boosted by Goldman accelerating stock buybacks, sending its outstanding share count to a record low.
The bank returned $8 billion to shareholders in 2017, but will not continue buybacks at that pace, Chavez said.
Instead, Goldman will use its tax savings to invest more capital in technology and talent to grow its businesses. The plan comes in contrast to rivals including Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co (NYSE:JPM), whose executives said they expect tax savings to support capital returns.
"We are working intensely to achieve our $5 billion in strategic growth initiatives with an emphasis on growing earnings and returns," Chavez said.
In bond trading, Goldman is trying to woo new types of customers, win more business from existing customers and trade different types of products, he said. Last quarter that business only managed to generate $1 billion in revenue, roughly a quarter of what Goldman posted at the peak of the bond trading boom.
Other businesses did better, with investment banking revenue rising 44 percent from the year-ago quarter to $2.1 billion, helped by strong debt and equity underwriting.
Investing and lending, which uses Goldman's own capital to generate income, reported $1.7 billion in revenue, up 12 percent from the fourth quarter of 2016. The unit was hurt by a $130 million loss on a loan to South African furniture retailer Steinhoff International, whose financial woes have caused losses at other banks too.
Investment management revenue rose 4 percent to $1.7 billion.