Goldman Sachs reports strength in equity underwriting, low M&A activity

By Jennifer Lanning Drey

Portland, Ore., July 14 - Goldman Sachs Group, Inc. posted second-quarter net revenues of $13.76 billion, demonstrating strength in equity underwriting and equity sales and trading but continued headwinds in mergers and acquisition advisory and security services, David Viniar, chief financial officer of Goldman, said Tuesday during the bank's quarterly earnings conference call.

Net revenues in financial advisory were $368 million in the second quarter, 54% lower than in the same quarter of 2008, primarily reflecting a significant decline in completed mergers and acquisitions.

"An uncertain macroeconomic outlook coupled with low CEO confidence has resulted in lower M&A activity," Viniar said.

The CFO later said M&A activity may pick up in the second half of the year but the related revenues won't be noticeable until 2010.

"I think people are feeling a little bit better, but not enough better to really pull the trigger yet, so confidence is going to have to go up even higher," he said.

Also within the investment bank, net revenues in the firm's underwriting business were $1.07 billion, 21% higher than in the same quarter of 2008, due to significantly higher revenues in equity underwriting, and higher net revenues in debt underwriting, Viniar said.

The CFO later said that although a high level of institutional equity was issued in the first half of the year, corporations around the world still need to rebuild their balance sheets, and if markets remain receptive, there will likely be many more equity offerings in the second half of the year.

The improvement in debt underwriting reflected strength in investment-grade and municipal issuance during the quarter, he said.

Overall investment banking net revenues were $1.44 billion for the second quarter, which was 75% higher than in the first quarter.

In the trading and principal investments segment, net revenues in fixed income, currency and commodities (FICC) were $6.80 billion, continuing to be driven by historically wide margins, strong market share and a focus on more liquid, "plain vanilla" transactions, Viniar said.

Credit products revenues also improved in the quarter, driven by higher customer activity across investment-grade and high-yield products, largely in cash and other liquid markets, he said.

Given the industry-wide reduction in hedge fund assets and leverage, the results within the securities services business were lower than in 2008.

Risks remain

In light of the difficult economic environment, the bank continues to conservatively manage its risk and liquidity levels, Viniar said.

Goldman's current levels of capital and liquidity reflect both the potential for further market disruption and opportunities to capitalize on distressed assets, he said.

When asked during the question-and-answer session about where the bank may look to deploy its cash, Viniar said it was difficult to say given that regulators' capital requirements are changing and attractive prices have yet to materialize.

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