Earnings At Goldman Were Up 29% In Quarter

Goldman Sachs reported a 29 percent increase in profit yesterday for its first quarter of 2007, setting a record amid growing concern on Wall Street over falling stock prices and an imploding subprime mortgage market.

The firm reported profit of $3.2 billion, or $6.67 a share, for the three months that ended Feb. 23, before the recent slump in the stock market and the wave of problems involving subprime lenders. That topped the $2.48 billion, or $5.08 a share, it reported in the period a year ago. Goldman said its net revenue was $12.7 billion for the quarter.

As the first major investment bank to report earnings for the period, Goldman may be a harbinger of another golden quarter for Wall Street firms. Lehman Brothers and Bear Stearns are to report this week, and Morgan Stanley next week.

Goldman’s profit was driven yet again by investment banking and trading. Trading and principal investments brought in $9.1 billion in revenue, a 36 percent increase over last year, powered largely by stock and bond trading.

Return on equity, a common measure of investment banking profitability, was 38 percent in the quarter, up from 36.4 percent in the year-earlier period, but down from 41.5 percent in the fourth quarter.

As the availability of easy credit continued to sustain a merger boom, Goldman’s investment banking revenue was $1.72 billion, an increase of 17 percent from a year earlier. The company attributed the gain to continued strength in advisory and debt underwriting activity.

Revenue from asset management fell 28 percent, to $1.07 billion, from $1.49 billion a year earlier. Goldman attributed the decline to a steep drop in the incentive fees it collected.

Goldman said compensation rose as a result of its higher earnings. It paid $6.11 billion in compensation and benefits for the quarter, up 15 percent from a year ago. Its compensation-to-revenue ratio for the quarter was 48 percent, down from 50.9 percent a year earlier.

The investment bank is one of several lenders to New Century Financial, one of the largest providers of mortgages to people with weak credit. Yesterday, New Century said in a regulatory filing that its lenders had frozen their credit lines to the company and demanded that it buy back mortgages it had made using that money, raising concern that New Century would file for bankruptcy.

In a conference call yesterday, David A. Viniar, Goldman’s chief financial officer, said he did not think market turbulence like the subprime mortgage shake-up would hurt future earnings.

“While strategically important to Goldman Sachs, I want to remind everyone that our mortgage business is modestly sized in relation to the overall firm and includes areas like the commercial and prime spaces,” he said.

Mr. Viniar said he did not foresee trouble from subprime mortgages spreading to the wider credit market. Over all, he said, Goldman had enough diversification that it could ride out future market shocks.

But Richard X. Bove, an analyst with Punk Ziegel, said that while the firm’s earnings were “fantastic,” Goldman and Wall Street had reached the end of the good times. As central banks worldwide tighten interest rates and hot markets like China cool, he predicted that Goldman’s share price would fall 20 percent by the end of the year. He has a rating of market perform on the stock.

“We’ve hit the peak of this particular cycle,” he said. “I don’t think it’s possible to replicate these kinds of returns for the next couple of years.”

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