October 18, 2011

Q3 Earnings: Goldman Joins Other Big Banks in Struggle Through Bad Economic Climate

Jones Villalta CIO says banks undervalued as deposits roll in, but trading and lending stymied

Joining other big banks that have reported third-quarter 2011 earnings in the last week, Goldman Sachs (GS) on Tuesday announced less-than-stellar results due to trading and investment bank weakness.

Goldman’s $428 million loss for Q3 represents only the second time that the investment bank has reported a quarterly loss since it went public in 1999. According to the bank’s report, the loss per share was $0.84 compared with earnings per share of $2.98 for Q3 2010 and $1.85 for the Q2 2011.

“It’s a horrible environment from an investment banking and trading standpoint,” said Tom Villalta, president and chief investment officer and portfolio manager of the Jones Villalta Opportunity Fund (JVOFX), in an interview with AdvisorOne.

Eyeing all the big banks that have reported thus far—Bank of America, Citigroup, JPMorgan and Wells Fargo in addition to Goldman—Villalta noted that investors are putting cash into their bank accounts as a safe haven, but business and consumer loans are still on hold as market uncertainty persists.

He pointed to the example of Wells Fargo, which saw 10% growth in deposits but only 1% growth in lending.

“It’s difficult for underwriters to find investments that make sense for the banks because we have a slow-growth environment where companies are unwilling to devote a lot of money to grow their businesses and consumer credit has gone down as individuals have right-sized their balance sheets,” Villalta said.

Goldman Sachs CEO Lloyd BlankfeinGoldman Chairman and CEO Lloyd Blankfein (left) attributed the bank’s loss to market volatility that ran rampant throughout the third quarter.

“CEO and investor confidence as well as asset prices across markets were lower in the third quarter given the uncertain macroeconomic

and market conditions,” Blankfein said in a statement. “Our results were significantly impacted by the environment and we were disappointed to record a loss in the quarter.”

Net revenues in Goldman’s investment banking activities were $781 million, 33% lower than the third quarter a year ago and 46% lower than the second quarter of 2011. Net revenues in the firm’s Underwriting business were $258 million, 61% lower than the third quarter of 2010.

However, net revenues in Goldman’s Financial Advisory business were 5% higher, at $523 million, versus the $499 million of revenues earned in the third quarter of 2010. Reflecting the poor quarter, though, Q3 2011 advisory revenues were 18% lower than the $637 million earned in Q2 2011.

In general, wealth management and private bank performance helped save the day for many big banks this quarter, according to Villalta.

“That’s an area that has held up much better than the investment banking side, especially the fee-based businesses,” he said. “A lot of those institutions are valued parts of those businesses because they are viewed as more stable than the investment banking and trading operations. That was the impetus to move in that direction years ago, and I think it has paid off.”

Villalta pointed to BofA’s purchase of Merrill Lynch as an example.

“You look at a company like Merrill Lynch, and in some circles it has been derided as a poor purchase on the part of Bank of America, and there’s some litigation around the purchase when it took place and what disclosures were made, but by and large we think that was an excellent purchase and that it has made an excellent contribution to Bank of America and will continue to contribute going forward,” he said.

A value investor, Villalta said that rather than selling out of bank stocks as a result of Q3 results, his fund has bought into weakness.

“We’ve maintained our positions in the banks,” he said. “I think it’s going to turn out to be a very good call for us over the next year to 18 months as these companies recover. There has been an unprecedented string of outflows from domestic equity mutual funds. Our feeling is that it’s an over-reaction. If you look at valuations today in the market, if you look at yields on loans, if you look at the money that’s shifted out of equity and into bonds over the last five years and where valuations are, we think it’s irrational to move money out of equities and into bonds.”

For more Q3 news, go to AdvisorOne’s Earnings Calendar for the Finance Sector.

Page 2 of 2
Single page view Reprints Discuss this story
This is where the comments go.