Goldman shows why it's still king of the heap

From Times staff writer Walter Hamilton:

Goldman Sachs Group gave to the market with one hand this morning -- and took away with the other.

The brokerage and investment banking titan comforted investors early on by reporting much-better-than-expected fiscal second-quarter earnings. That helped ease some of the fresh concern about the financial sector triggered last week by Lehman Bros. Holdings Inc.’s warning of a huge quarterly loss.

But later in the morning a team of Goldman analysts helped spark another sell-off in financial shares with a gloomy report on commercial banks. The analysts predicted that banks may have to raise another $65 billion in capital this year to rebuild their balance sheets amid the ongoing stream of credit-related write-downs.

Regional bank stocks are taking another sharp hit today, led by Salt Lake City-based Zions Bancorp, which warned of rising loan problems tied to the housing market’s woes in the Southwest. Zions shares were down $3.37, or 9.1%, to $33.79 at about 11:45 a.m. PDT.

The BKX index of 24 bank stocks is at yet another multiyear low, extending its year-to-date decline to nearly 26%. After rallying in April, many bank stocks have since crumbled as investors have reassessed the potential for worsening loan losses.

Goldman held out little hope for a snap-back in the stocks soon. "We believe that a broad-based rally in bank shares is unlikely in coming months," analyst Richard Ramsden wrote.

Meanwhile, if there’s to be a survivor in the financial sector overall after this mess, Goldman is the likely candidate. The company’s profit in the quarter ended May 30 was down 11% from a year earlier but still handily beat analysts’ estimates -- a tribute to the breadth of the firm’s businesses.

Goldman reported net income of $2.09 billion, or $4.58 a share, compared with $2.33 billion, or $4.93 a year ago. Analysts had expected $3.42 a share. Revenue totaled $9.42 billion in the latest quarter, down 7% from $10.2 billion a year earlier.

Reflecting the upheaval in markets from the credit crunch, Goldman’s fixed-income and investment banking results were weak. But that was offset by strength in commodities trading, asset management and prime brokerage.

Goldman’s shares were about flat at 11:45 a.m. PDT, at $181.08, while the broader market was lower. The stock is down 27% its its record high of $247.92 reached on Oct. 31, but that’s minor compared with how most brokerage issues have collapsed.

And Goldman’s chief executive, Lloyd Blankfein, isn’t shy about reminding Wall Street that as the weak get weaker, the financial business is a veritable smorgasbord for strong predators.

"We are realistic about the market challenges we face, but times of dislocation also produce opportunities and we will continue to take advantage of the most attractive of these as they arise," he said in a statement.

Photo: Lloyd Blankfein. Suzanne Plunkett/Bloomberg News