Goldman results to hinge on trading performance

Goldman Sachs Group Inc is expected to report sharply lower quarterly earnings due to weak trading results and a charge for buying back preferred stock from Warren Buffett's Berkshire Hathaway.

Analysts surveyed by Thomson Reuters I/B/E/S on average expect Goldman to post first-quarter earnings of 82 cents per share, down from USD 5.59 a year earlier.

Goldman bought back USD 5 billion of preferred stock from Berkshire Hathaway during the quarter, reducing its earnings by USD 1.6 billion.

Trading weakness is also expected to weigh on results. Last year's first quarter offered a trading bonanza for many Wall Street banks, but making money in that business this year was much tougher, because many markets moved unpredictably.

Oil prices surged and the yen jumped against the dollar. Other markets did not move clearly in any direction, spurring clients to wait on the sidelines.

JPMorgan Chase & Co still managed to post strong trading results last Wednesday, especially in fixed income, currencies and commodities.

Bank of America Corp and Citigroup both reported big trading revenue declines from the year-ago period.

Goldman's bond trading results have in the past correlated with both JPMorgan's and Bank of America's.

"JPMorgan's results should translate to a pretty decent quarter at Goldman, but there are examples in the past where some of these big banks did a much better job than others," said Keith B. Davis, an analyst with Farr, Miller & Washington, which owned 100,000 Goldman shares as of Friday afternoon.

Political risks

More than any other bank on Wall Street, Goldman relies on trading results. That business delivered 56% of Goldman's overall net revenue last year, compared with 34% for Morgan Stanley, 19% for JPMorgan and 16% for Bank of America.

Over the past month, analysts have been reducing their estimates dramatically for Goldman and Morgan Stanley, mainly due to expectations of weak trading results and special items.

Davis and Wall Street analysts have said that Goldman's stock is undervalued, as investors fret about the political and regulatory environment and pay less attention to its fundamental ability to earn.

Goldman trades at 1.18 times analysts' average estimate of book value, according to Thomson Reuters data, far below historical norms.

But the political risks that Goldman faces were evident last week, when the Senate Permanent Subcommittee on investigations released a report about the financial crisis that painted the bank as a villain.

The report provided detailed evidence of Goldman shorting the US housing market and profiting at the expense of clients.

Senator Carl Levin, the Michigan Democrat who heads the subcommittee, accused the company of exploiting clients and accused executives of lying to Congress during a hearing last year.

Levin hinted that Goldman may face further investigations into its practices from the Justice Department or Securities and Exchange Commission.

The SEC settled civil fraud charges against Goldman in July related to one of the deals cited in the subcommittee report. The SEC collected a USD 550 million fine, while Goldman pledged to make changes to its reporting and disclosure practices, which it has since done. The bank said in January it is changing the way it does business and the way it handles conflicts.

Analysts are skeptical that further action will be taken. However, Goldman shares fell more than 3% after the subcommittee's report was made public, reflecting concern within the investor community.

"Most people who trade investment banking stocks for a living are much more focused on economics and whether a company is going to earn money and how much money it's going to earn," said Susquehanna Financial Group analyst David Hilder. "They're often uncomfortable with regulatory and political risk."