Goldman Sachs Q2 earnings drop on $1.45 billion provision to cover legal costs

NEW YORK, N.Y. – Goldman Sachs’ second-quarter profit slumped by more than 50 per cent after the firm set aside $1.45 billion for legal costs related to mortgage-backed securities.

The large legal charge marred what would otherwise have been a relatively good quarter for the bank. Its investment banking business benefited from a surge in corporate deals and earned more in fees from advising clients. Those gains were offset by falling revenue at the bank’s bond and currency trading unit.

THE NUMBERS: Total net income fell to $916 million from $1.95 billion a year earlier, Goldman Sachs said Thursday. That was after paying dividends on preferred stock. On a per-share basis, quarterly earnings fell to $1.98.

Overall, revenue slipped 1 per cent to $9.07 billion, although that was better than the $8.75 billion analysts had expected, according to the data provider FactSet.

LEGAL WOES: Goldman said that the cost of provisions for mortgage-related litigation and “regulatory matters” cut earnings per share by $2.77. The costs stem from potential misconduct relating to the sale of securities backed by residential mortgages. Those securities plunged in value during the financial crisis.

DEALS MEANS DOLLARS: Revenue from investment banking jumped 13 per cent to $2.02 billion. Goldman advised on deals such as oil giant Shell’s $70 billion acquisition of gas company BG Group, as well as Intel’s $16.7 billion acquisition of chip designer Altera. Deals have surged this year as companies take advantage of low interest rates to finance acquisitions.

Revenue at the bank’s investment management arm also rose, climbing 14 per cent from a year earlier.

THE WEAK SPOT: Goldman’s bond and currency trading business had a weak quarter. The slowdown was driven in part by weakness in Europe, where worries about a potential Greek exit from the euro impacted trading, Goldman Chief Financial Officer Harvey Schwartz told analysts on a conference call. Revenue at the unit slumped 28 per cent.

THE QUOTE: The environment for the banks’ bond trading clients was challenging in the second quarter due to increased volatility in financial markets, said Schwarz.

“Greece (was) in the headlines continuously,” he said. “It was not surprising that we saw reduced client activity in a more difficult market making environment.”

THE STOCK REACTION: Goldman’s stock fell $3.05, or 1.4 per cent, to $209.93. The stock has climbed 8.3 per cent this year, compared with a 7.5 per cent gain for the KBW bank index.