Goldman finds gold

Investment bank handily tops analysts' forecasts; results boosted by strength in trading, deal-making.

By Grace Wong, staff writer

NEW YORK ( -- Wall Street powerhouse Goldman Sachs reported record quarterly earnings and revenue Tuesday, exceeding even the most upbeat forecasts from analysts.

The robust results helped ease concerns that the recent market rout and growing problems in subprime lending could hurt the firm.

The New York-based investment bank said net income surged 29 percent to $3.2 billion, or $6.67 a share, for its fiscal first quarter ended Feb. 23. Net revenue climbed 22 percent to $12.7 billion.

Goldman's first quarter ended four days before a drop in Chinese stocks and concerns about economic growth sent global markets into turmoil. Like other investment brokerages, Goldman's profitability is closely linked to the health of financial markets.

If the recent market uncertainty were to persist, investor confidence would weaken and could "meaningfully slow" business, CFO David Viniar told analysts during a conference call.

But Goldman remains confident about the opportunities it sees across its businesses and the overall conditions that have fueled the company's growth over the past few years remain intact, he added.

Goldman said the subprime sector within the mortgage market experienced significant weakness during the quarter, but Viniar emphasized that the mortgage business is modestly-sized relative to the overall firm, and also includes commercial and prime business.

Furthermore, there haven't been any signs yet that problems in subprime are spreading to other parts of the mortgage market. "The difficulty in the market has been so far largely contained to the subprime market," he said.

There have been concerns that rising subprime defaults could hurt Wall Street firms, since they have bankrolled many of these home loans to borrowers with weak credit and have purchased large portfolios of subprime loans.

Goldman is considered to have less exposure to this area compared to competitors like Lehman Brothers (Charts), Morgan Stanley (Charts) and Bear Stearns (Charts), but if the crisis in subprime spreads to the broader economy, the investment brokerage could take a hit.

Analysts had expected Goldman's earnings to dip slightly from a year earlier but, as it has in recent quarters, Goldman easily topped forecasts on strength in its trading and banking divisions.

"Their team turned in what was an excellent quarter," said Marc Davis of Tradition Capital Management, a money manager that owns shares of Goldman.

The company's trading and principal investments division raked in $9.4 billion in revenue, up 35 percent from the previous year. Goldman has generated an increasingly bigger chunk of its revenue from trading for its own account.

Strong deal activity helped the company's investment banking division, which advises companies on mergers and acquisitions and helps firms go public and issue debt, pull in revenue of $1.72 billion, a 17 percent jump from the year-ago period.

Analysts say, however, that the first quarter tends to be the strongest for investment brokerages, and Goldman could have trouble keeping up its record-setting pace.

The solid results kick off earnings for investment brokerages. Lehman is due to report results Wednesday and Bear Stearns is on tap for Thursday.

Shares of Goldman Sachs (up $0.09 to $202.69, Charts) rose about 1 percent in midday trading.

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