March 18 (Bloomberg) -- Goldman Sachs Group Inc., the world's biggest securities firm by market value, reported a smaller-than-estimated 53 percent drop in first-quarter profit after asset writedowns and lower fees from investment banking.
Net income fell to $1.51 billion, or $3.23 a share, in the three months ended Feb. 29 from $3.2 billion, or $6.67, a year earlier, the New York-based firm said in a statement today. The average estimate of 17 analysts surveyed by Bloomberg was for $2.59 a share, with forecasts ranging from $1.95 to $3.40.
Chief Executive Officer Lloyd Blankfein is navigating a credit market crisis that led the U.S. Federal Reserve and JPMorgan Chase & Co. to organize a bailout and then takeover of Bear Stearns Cos. Goldman's profit dropped the most since 1999, reduced by $1 billion of writedowns for high-yield loans and a $135 million decline in the value of its stake in Beijing-based Industrial & Commercial Bank of China Ltd. Losses on mortgage loans and related securities were about $1 billion.
Goldman has stayed ``above the fray and probably faces the least amount of risk,'' said Ralph Cole, who helps oversee $2.7 billion, including Goldman shares, at Ferguson Wellman Capital Management in Portland, Oregon, before the earnings release. ``People have a tremendous amount of confidence in them and that's what it comes down to these days.''
The first quarter marks the 11th straight that Goldman's earnings exceeded analysts' estimates, according to data compiled by Bloomberg. Goldman has declined 30 percent this year in New York Stock Exchange composite trading as losses in subprime mortgages eroded confidence in the credit markets.
Leveraged Loans
The fixed income business posted about $1 billion of losses on residential mortgages and securities, as well as a $1 billion loss on high-yield, or leveraged, loans. The firm's principal investments division reported a loss of $532 million, including the drop in the value of its investment in China's ICBC and $410 million from stakes in other companies and real estate. A year ago, the unit produced a $1.7 billion gain.
Revenue from fixed-income, currencies and commodities, Goldman's biggest division, fell 32 percent to $3.14 billion. Equities trading revenue fell 19 percent to $2.5 billion from $3.1 billion a year earlier. Investment banking revenue tumbled 32 percent to $1.17 billion from $1.72 billion in the same period last year.
Goldman's overall net revenue dropped 35 percent to $8.3 billion in the first quarter, its biggest decline since the firm went public in 1999. Return on equity, a measure of how effectively the company reinvests earnings, was 14.8 percent in the first quarter, down from 38 percent a year earlier.
Bear Run
Banks and brokers have taken more than $195 billion in writedowns and credit losses on securities linked to subprime mortgages since the start of 2007, eroding investor trust in financial institutions. Bear Stearns, the smallest of the five biggest U.S. securities firms, lost the ability to finance itself last week as lenders pulled their funding.
In an extraordinary move aimed at restoring confidence in the markets, the Fed backed JPMorgan's $240 million purchase of Bear Stearns by agreeing to finance $30 billion of the least liquid securities on Bear Stearns's balance sheet. The central bank is also allowing securities firms to borrow cash from the Fed, like banks, using high-grade mortgage-backed and other securities as collateral.
``These steps will provide financial institutions with greater assurance of access to funds,'' Fed Chairman Ben S. Bernanke said in a March 16 statement to reporters.
Hedge Fund Gains
As Bear Stearns and Merrill reported mortgage-related losses last year, Goldman posted record results. Blankfein, 53, was the highest-paid Wall Street CEO for the second year.
One Goldman unit that performed better than last year was the securities services division, which lends to hedge funds and processes their trades. Revenue in the business climbed 38 percent to $722 million.
Goldman probably will continue to benefit from its strength relative to competitors, even as demand for takeover and underwriting advice declines, said Cole of Ferguson Wellman.
``People were asking why would I do business with Bear when Goldman's there?'' Cole said. ``It seemed like Goldman picked up market share due to lack of confidence in Bear.''
Goldman advised on $124 billion of takeovers completed during its fiscal first quarter, less than half the $300 billion it finished in the same period a year earlier, Bloomberg data show. The decline coincided with an 18 percent slump in the value of new takeovers announced worldwide as volatile stock and debt markets slowed the pace of deal-making.
Goldman managed stock and stock-linked offerings worth $10.1 billion, up from $9.6 billion a year earlier, the data show.
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