Goldman Sachs Group Inc.'s earnings easily beat analysts' forecasts again, but the bank saw a big slowdown in trading, its most profitable business.
Net income after paying preferred dividends fell 43 percent from the year-ago period as revenue in the bank's bond, currency and commodities trading division fell to its lowest level since the depths of the financial crisis in late 2008.
"It definitely was not as bad as many were predicting, but that said, it was not that good," said Michael Wong, an equity analyst at Morningstar Research. "It's like investment banks are having a double-dip in their earnings."
Goldman's results are closely watched because they considered the strongest bank on Wall Street and regularly exceed forecasts. The decline in Goldman's earnings could signal a change in the mix of how investment banks make money now that financial markets have steadied themselves following the credit crisis and recession.
Wong said trading revenue during the third quarter is likely to be closer to the levels seen going forward than its post-crisis peak earlier this year. Trading revenue is down 40 percent from the first quarter of the year.
Investment banks might have to rely more on their traditional businesses of underwriting stock and bond offerings to make up for a slowdown in trading. Goldman's revenue from debt underwriting surged 59 percent during the third quarter.
Overall, revenue fell 28 percent to $8.9 billion, but still came in well ahead of the $7.92 billion analysts polled by Thomson Reuters had forecast.
Income fell to $1.74 billion, or $2.98 per share, the bank said Tuesday. It earned $3.03 billion, or $5.25 per share, during the same three-month period last year. Analysts predicted earnings of $2.32 per share.
Beating expectations was enough to drive Goldman's shares higher, despite a broad decline in the stock market. They rose $3.02, or 2 percent, to $156.72.
Analysts said a lack of market volatility and expectations for continued stability in interest rates hurt trading volume during the quarter.
Goldman's chief financial officer David Viniar also pinned the slowdown in trading on customers who were skittish about the health of the broader economy.
"The operating environment during the third quarter was dominated by heightened uncertainty surrounding the global economic outlook," Viniar said on a conference call.
Analysts say the slowdown in the trading division wasn't a surprise and had slashed their earnings estimates by 24 percent over the past month to reflect those expectations.
The decline in Goldman's overall revenue was also tied to a slowdown in stock trading, which was seen industrywide. Trading volume on major stock exchanges bottomed during the third quarter and is only starting to pick back up. Viniar said there have been some signs of life in trading, but it's still too early to tell whether it's sustainable.
Goldman also didn't make nearly as much on its investment in Industrial and Commercial Bank of China Ltd. Goldman's stake in the Chinese bank generated just $9 million in revenue during the quarter, down from $344 million during the same quarter last year.
While low interest rates hurt the trading business, they benefited the investment banking division, which reported a 24 percent jump in revenue. With borrowing rates so low, many companies were eager to issue new debt.
The New York-based bank continued to reduce compensation costs. The bank was strongly criticized during the financial crisis for doling out big paychecks even after it received government aid and while the broader economy suffered.
Goldman set aside $3.83 billion for compensation and benefits during the quarter. It has now set aside $13.12 billion for compensation during the first nine months of the year, a 21 percent drop from the same period last year.
Compensation totaled 43 percent of the company's revenue for the year so far, down from 47 percent last year.