Wall Street’s biggest names are getting their mojo back.
Goldman Sachs Group Inc.,Citigroup Inc. and Blackstone GroupLP each posted blowout earnings Thursday that topped analysts’ expectations, signaling that many of the financial industry’s cylinders are firing.
The results were particularly notable at Goldman, which received a big boost from its trading desks—a core focus for the firm. Goldman had stuck by those businesses even as waves of new regulations drove rivals to focus on less risky and capital-intensive financial services, and its executives enjoyed a told-you-so moment Thursday morning.
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At a meeting in the auditorium of Goldman’s downtown Manhattan headquarters, the firm’s chairman and chief executive told his managing directors to savor briefly the occasion before getting back to work, people familiar with the matter said. The results, Lloyd Blankfeintold the group, marked the culmination of years of work to position the firm for the postcrisis era, the people said.
Goldman earned $2.84 billion, up from $2.03 billion, in the same period of 2014. Revenue rose 14% to $10.62 billion, the highest level in four years, on strong gains from trading and merger-advisory fees.
Goldman’s stock traders had their best quarter since 2010. The investment-banking division hit a seven-year high. Revenue from bonds, currencies and commodities trading rose from a year earlier for the first time in more than a year.
The good times on Wall Street were underscored by a relatively new entrant: Blackstone, the giant investment firm that has become one of the world’s financial powerhouses through leveraged buyouts, real-estate assets and other deals. The firm said its first-quarter profit more than doubled to $629 million and set several profitability records as it sold assets at big gains.
The profit enabled Blackstone to pay out an 89-cent quarterly dividend, the largest in its history and more than the firm has paid out for many full years.
Blackstone and its rivals are some of the biggest clients of investment banks like Goldman and Citigroup, using them for everything from underwriting initial public offerings of companies they own to funding their debt-laden takeovers. Blackstone alone paid out $172 million to investment banks during the first quarter, up 48% from a year earlier, Dealogic estimates—by far the most of any private-equity firm.
Emblematic of the type of deals Blackstone paid bankers to execute was the sale in January of about $509 million worth of stock in arts-and-crafts retailer Michaels Cos. Blackstone, Bain Capital LLC and other investors tapped banks including Goldman and J.P. Morgan Chase & Co. to sell the shares, allowing them to keep a 4% cut as a commission.
Wave of Deals Powers Profits for Wall Street
Goldman and Citigroup each posted strong advisory results, following on similar gains posted by J.P. Morgan and Bank of America Corp. earlier in the week. Those profit are likely to continue rolling in as more 2014 deals close and given that 2015 has been an even better year so far for mergers.
Analysts and investors were quick to point out that Wall Street results often peak during the first quarter and tail off during the summer months as markets turn less active. “Let’s not get ahead of ourselves,” UBS AG analyst Brennan Hawken said.
Indeed, Citigroup, which reported a larger-than-expected 21% jump in profit to $4.77 billion, bucked some of the industry trends. Citigroup’s trading revenue was down 9.5% to $4.36 billion from $4.81 billion a year ago, hurt in part by getting caught off balance when the Swiss franc surged earlier this year after the Swiss National Bank unexpectedly lifted its cap on the currency.
Citigroup’s overall performance was helped by aggressively cutting costs.
Amid a flurry of new rules on bank capital and risk taking that pushed many rivals from various corners of trading businesses, Goldman has argued its role as an intermediary would remain as essential in the postcrisis world as it had in past eras—and that the firm would profit from its perseverance when the markets turned more active again.
“They have probably silenced critics of their business, at least for a little while,” Mr. Hawken said.
Goldman’s return on equity, a measure of banks’ profitability, rose to 14.7% in the first quarter, on an annualized basis. It was the firm’s highest since late 2012, defying investors’ skepticism on whether big banks could ever again come close to producing the 20-plus returns that seemed routine in the years before the financial crisis.
Goldman finance chief Harvey Schwartz on a call with analysts said the first quarter was “a good, solid performance,” then noted “our aspiration to deliver for our shareholders are higher.”
The moment wasn’t lost on investors and analysts, who caught a flash of the Goldman confidence that at times seemed more like defensiveness when the businesses models of rivals such as Morgan Stanley and UBS drew praise.
“It kind of perked up my ears,” said Mike Mattioli, a portfolio manager at John Hancock Asset Management, a unit of Manulife Financial Corp. and one of Goldman’s largest shareholders.
Goldman shares fell 0.9% after a sharp rise early in the week. Citigroup shares gained 1.5% and Blackstone ticked up 0.3%.
Glenn Schorr, an analyst with Evercore ISI, said it remains to be seen if Goldman can sustain these types of results. But Thursday’s earnings revealed how, under the right conditions, “Goldman could be the old Goldman” again.
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