Goldman Sachs Group Inc (GS.N) reported a 58 percent jump in third-quarter profit on Tuesday as bond trading rebounded and the Wall Street bank managed to keep a lid on expenses.
Goldman reported nearly $2 billion in revenue from trading fixed income, currency and commodities, making it the biggest contributor to overall revenue.
Strong bond issuance and better conditions in credit and mortgage markets helped the bottom line, Chief Financial Officer Harvey Schwartz said on a conference call with analysts. But he noted that the business only seems to be doing so well because it performed so poorly in the year-ago period.
"It wasn't so much about tailwinds as it was about not having so many headwinds in the quarter," said Schwartz. "It translated nicely for us."
He noted that while credit and mortgage trading results were better, currencies were flat and rates declined slightly.
Goldman, the fifth largest U.S. bank by assets, has historically been more reliant on bond trading than its peers. That helped the bank earn big profits leading into the 2007-2009 financial crisis, but financial reform rules imposed since then have hindered the business.
In an effort to buoy profits, Goldman launched an efficiency program earlier this year, with the goal of reducing annual expenses by $700 million.
That program was evident in its third-quarter results, with operating expenses up just 10 percent, compared to a 19 percent rise in net revenue. Staff levels were down 5 percent compared to the third quarter of 2015.
Goldman shares, which had fallen 6.2 percent this year through Monday's close, were up 1.3 percent in morning trading, to $171.19.
Overall, Goldman generated $2.1 billion in net income for common shareholders, up 58 percent from the year-earlier period. It was the bank's second straight rise in quarterly profit after four quarters of decline.
Earnings per share rose to $4.88 from $2.90, partly because Goldman bought back roughly 22 million of its own shares over that time. Analysts on average had expected earnings of $3.82 per share, according to Thomson Reuters I/B/E/S.
In a statement, Chief Executive Lloyd Blankfein described it as "solid performance."
Goldman's return-on-equity – a closely watched measure of how well a bank uses shareholder money to generate profit – was 11.2 percent in the quarter. Those returns have been weighed down by higher capital requirements imposed following the 2007-2009 financial crisis. Analysts and investors generally expect big banks to produce returns of at least 10 percent to meet their basic cost of capital.
Goldman has been trying to shift its business model over the last several years to rely less on trading and more on stable businesses like investment management. That division generated revenue of $1.49 billion, up 4 percent from the year-ago period.
The bank has also dived into consumer lending, launching an online platform called Marcus last week. Goldman is taking a "slow and methodical" approach to building that business, Schwartz said.
Investments and loans Goldman makes with its own balance sheet were another bright spot in the quarter. The bank's revenue from investing and lending more than doubled to $1.4 billion, due to higher stock market values.
Investment banking revenue, which includes income from advising on mergers and acquisitions as well as underwriting bond and share offerings, fell 1.2 percent to $1.54 billion.
Goldman topped all banks globally in M&A fees in the quarter, a slow one for deals, but trailed JPMorgan in revenue from underwriting bond and equity offerings, according to Thomson Reuters data.
Its equities-trading revenue rose 2 percent to $1.78 billion.
Goldman's results echoed trends reported by Wall Street rivals including JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N) and Bank of America Corp (BAC.N). Its chief rival, Morgan Stanley (MS.N), is due to report results on Wednesday.
(Reporting by Olivia Oran in New York and Sruthi Shankar in Bengaluru; Writing by Lauren Tara LaCapra in New York; Editing by Ted Kerr and Nick Zieminski)