Goldman Sachs Group Inc (GS.N) said on Tuesday quarterly profit doubled, beating Wall Street estimates, boosted by returns from investing the bank's own money.
The investing and lending segment, which tracks the bank's investments in debt and equity markets, produced nearly seven times as much revenue in the second quarter as it did a year earlier, much more than analysts had expected.
RELATED: GOLDMAN SACHS BESTS JPMORGAN IN INVESTMENT BANKINGInvestors question how much revenue growth the bank can generate in this sector under new regulations. The Volcker rule, part of the 2010 Dodd-Frank financial reform law, limits banks' bets with their own money. But the industry has years to comply with the law, and Goldman believes most of its investing and lending activities already do.
Overall, Goldman's net income rose to $1.86 billion, or $3.70 per share, in the second quarter from $927 million, or $1.78 per share, in the same quarter last year.
Analysts on average had expected $2.82 per share, according to Thomson Reuters I/B/E/S.
Goldman shares rose 1.3 percent at $165.13 in premarket trading. Net revenue rose 30 percent to $8.61 billion.
Keith Horowitz, a bank stock analyst at Citigroup, said in a research note that strong investing and lending revenue, combined with a lower-than-expected tax rate, drove Goldman's earnings beat.
Goldman shares were down 50 cents to $162.50 in early trading on the New York Stock Exchange. The biggest contributor to revenue was fixed income, currency and commodities (FICC) trading, which reflects income from client business. Revenue there rose 12 percent to $2.46 billion.
The biggest source of growth was the investing and lending division, where revenue surged to $1.42 billion from $203 million a year earlier. JMP Securities analyst David Trone had expected the segment to produce revenue of $850 million.
The segment's results have oscillated wildly since it was set up in 2009, delivering anywhere from $2.9 billion to $7.5 billion in revenue annually.
New regulations have made it more expensive to be in many of the businesses that once delivered massive profits for Goldman and other Wall Street banks. As a result, return-on-equity (ROE) - a closely watched measure that shows how much profit a bank can squeeze from shareholders' funds - has been pressured in recent years as it has become more expensive for banks to hold risky assets.
Still, Goldman managed to produce 10.5 percent ROE in the second quarter, above the 8 percent some analysts were expecting and the 10 percent benchmark that analysts say is break-even to meet a bank's cost of capital.
Andrew Aran, partner and portfolio manager at Regency Wealth Management, said Goldman's revenues were strong - particularly investing and lending and underwriting - and its expense controls were impressive. However, he also said the ROE figure was surprisingly low. "Ten and a half percent is certainly nothing to write home about from an ROE perspective," he said.
Goldman's investment banking revenue rose 29 percent to $1.55 billion, helped by a 45 percent increase in underwriting revenue. "Improving economic conditions in the U.S. drove client activity," Chief Executive Lloyd Blankfein said in a statement, adding that "the operating environment has shown noticeable signs of improvement."
Goldman's results echoed similar trends in the investment banking units of JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N), whose fixed-income trading businesses also benefited from improvements in trading and underwriting revenue in the second quarter.
Reporting by Lauren Tara LaCapra in New York and Tanya Agrawal in Bangalore, both of Reuters.