By Lauren Tara LaCapra and Tanya Agrawal
(Reuters) - Goldman Sachs Group Inc said revenue from bond trading with clients fell 7 percent in the first quarter, raising questions about the health of the bank's biggest money maker and the prospects for fixed-income trading profits on Wall Street.
The bank's equities trading revenue fell 15 percent, but the decline in fixed income trading was the bigger concern for many analysts. Fixed income, currency, and commodities trading has long been the biggest revenue generator at the bank, and the outlook for the business is cloudy as more volume moves to exchanges and central clearinghouses.
Goldman shares were down 1.7 percent to $144.00 in afternoon trading.
On a conference call, analysts peppered Harvey Schwartz, Goldman's chief financial officer, with questions about how the bank plans to boost trading revenue in the future.
Schwartz said Goldman hopes to win market share from banks that are pulling back from bond trading and other businesses. Even if the near term is a little uncertain, Goldman has enough strength in areas ranging from commodities to prime brokerage to maintain a full range of trading businesses, he said.
The trading results overshadowed the bank's overall profit, which rose 5.5 percent as other businesses made up for trading declines. Goldman's own investments grew more valuable, and its investment banking revenue climbed. Yet each of those businesses is less than half the size of the trading franchise.
Overall, Goldman reported just a 1.4 percent increase in revenue, which David Trone, an analyst with JMP Securities, said indicated a "lack of momentum."
At one time, Goldman reported its own trading profits and client trading profits together in one business line. But it separated the two items in 2011 after investors and shareholders complained that its earnings were too opaque. The bank now has an earnings segment called "Investing and Lending" that shows how much revenue Goldman receives from mark-ups on a wide range of investments - from stocks and bonds to mines and metal warehouses - as well as interest payments on loans.
For the first quarter, Goldman reported $2.1 billion of revenue from Investing and Lending, an 8 percent rise from a year earlier and the second-highest total since it began separating out that earnings category. Most of the increase came from gains in private-equity holdings, the bank said.
Overall first-quarter profit rose thanks to both the Investing and Lending gains and sharp increases in stock and bond underwriting fees. Net income applicable to common shareholders rose to $2.19 billion, or $4.29 per share, from $2.07 billion, or $3.92 per share, a year earlier.
Analysts on average had expected earnings of $3.88 per share before unusual items, according to Thomson Reuters I/B/E/S.
"Trying to predict bank earnings down to the penny is an impossible task because they're just so non-transparent," said Bernie Williams, vice president of discretionary money management at USAA Investments, which oversees $55 billion in assets.
But among big banks, "Goldman probably has the widest variance" compared to expectations, he said, because Goldman is so heavily weighted in trading and principal investments.
PRESSURE ON BOND TRADING
Fixed income, currency and commodities trading faces profit pressure in coming years as the market changes. More trades are being cleared centrally or taking place on an exchange, rather than taking place bilaterally between a bank and a client, meaning banks are making less money from serving as a middlemen between clients.
Goldman's first-quarter revenue from fixed income, currency and commodities trading fell to $3.22 billion from $3.46 billion a year earlier. Equities trading revenue fell to $1.922 billion from $2.25 billion.
In 2011, the bank's CFO at the time, David Viniar, acknowledged these pressures. "It's pretty clear that some of the technological advances that happen in equities are going to happen in some of the FICC businesses," he said.
With these challenges, many of Goldman's competitors are retreating. UBS, for example, is pulling back from the fixed income, currencies and commodities trading business.
Less competition may help Goldman Sachs, CFO Schwartz said.
"It feels like there is reasonable market share opportunity, given the environment," he said on an earnings conference call. For competitors, "unless you're a leader in some of these businesses, I think it is a difficult time to build," he added.
GAINS FROM EQUITIES
Goldman's first-quarter revenue totaled $10.09 billion. Investment banking revenue jumped 36 percent to $1.57 billion.
Operating expenses were little changed at $6.72 billion.
Goldman's annualized return-on-equity, a closely watched measure of profitability, rose to 12.4 percent from 12.2 percent a year earlier but was still far below pre-crisis levels above 30 percent.
Goldman's Investing and Lending earnings come mostly from mark-to-market gains on stocks, bonds, loans and other assets. It also included interest income from loans.
The unit continues to befuddle investors and analysts since it invests in a wide array of assets and there is little disclosure.
JPMorgan Chase & Co, the biggest U.S. bank, reported a 33 percent rise in first-quarter profit on Friday, but most of its major businesses turned in lackluster performances.
Citigroup reported a 30 percent rise in profit on Monday, helped as the bank made more money from underwriting stock issues and advising companies on mergers.
(Reporting By Lauren Tara LaCapra in New York and Tanya Agrawal in Bangalore; Editing by Supriya Kurane and John Wallace)