Goldman Sachs Charts Frustrating Path Back To Top

Goldman Sachs is charting a frustrating path back to the top. Trading, share buybacks and operating leverage all helped the investment bank earn $2.1 billion in the third quarter, its best showing in a year-and-a-half. The way it beat its cost of capital, though, fails to inspire full confidence.

More than half the $1.3 billion increase in revenue from a year ago derived from the company’s investing and lending division. Gains on equity investments accounted for most of it. That’s fine, as far as it goes. Results in this area fluctuate wildly, however. And new regulations are curbing how large this part of the business can be.

What’s more, Goldman’s tax rate slipped to 27 percent for the three months to the end of September, compared to a rate of at least 30 percent. If taxes had been more like the usual and investment gains half what was reported, the annualized return on equity for the quarter of 11.2 percent would have dipped to around 9.3 percent.

Even so, Goldman fared well by current industry standards. Few rivals have managed to achieve the 10 percent return considered the theoretical cost of capital. And the bank run by Lloyd Blankfein is hitting the right notes elsewhere.

Fixed-income trading jumped 34 percent, roughly in line with rivals Bank of America, Citigroup and JPMorgan. Top-line gains of 19 percent outpaced the 10 percent increase in expenses as Goldman slashed non-compensation costs by almost a quarter.

There was good news for employees, too. The amount set aside for bonuses swelled by more than a third, even as staff levels fell 5 percent as Goldman reversed its mistimed hiring exuberance last year.

There was another unexpected benefit: buybacks reduced outstanding shares by 6 percent, far more than the 1 or 2 percent decrease Goldman has tended to implement. That further helps push up shareholder returns.

As welcome as these many elements are, Goldman’s earnings look overly lumpy. That makes them too unreliable to justify its shares heading back above book value any time soon.