Goldman Sachs profit doubles on investment gains, lower tax rate

Tue Jul 16, 2013 6:00pm EDT
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By Lauren Tara LaCapra

(Reuters) - Goldman Sachs Group Inc (GS.N: Quote) said quarterly profit doubled, boosted by investment gains and a lower tax rate, but investors fretted that these factors will not be repeated in future periods, sending the bank's shares lower on Tuesday.

Goldman's investing and lending segment, which tracks its investments in private equity deals, publicly traded stocks, loans and bonds, produced nearly seven times as much revenue in the second quarter as in the same period last year, much more than analysts expected.

Investors questioned how much revenue growth the bank can generate by investing its own capital under new regulations. The Volcker rule, part of the 2010 Dodd-Frank financial reform law, limits banks' market wagers 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.

Goldman's effective tax rate dropped to 27 percent from 32 percent in part because the bank is electing to keep more of its international income permanently offshore, and because it earned more money overseas. Chief Financial Officer Harvey Schwartz told analysts on a conference call that the lower tax rate was not likely to be repeated.

"It's tough to get too excited about these numbers because they're potentially unsustainable," said Tom Jalics, senior research analyst at Key Private Bank, whose clients own bank shares.

The results underscore the difficulties Goldman and its rivals face in navigating the post-crisis world. With regulators pressing banks to boost capital levels, many of Goldman's most profitable businesses are earning less. The bank's return on equity, a measure of how effectively it wrings profit from shareholders' money, was just 10.5 percent in the second quarter, a hair above what it would pay for equity funding.

Overall, Goldman's net income rose to $1.86 billion, or $3.70 per share, in the quarter, from $927 million, or $1.78 per share, a year earlier.

Analysts on average had expected $2.82 per share, according to Thomson Reuters I/B/E/S.   Continued...

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2013. GREUTERS/Brendan McDermid