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Goldman Sachs (GS) Q1 Earnings Impress on Improved Trading

Zacks

Riding on strong fixed income trading revenues, Goldman SachsGS first-quarter 2018 results recorded a positive earnings surprise of 22.6%. The company reported earnings per share of $6.95, comfortably beating the Zacks Consensus Estimate of $5.67. Further, the bottom line witnessed 35% year-over-year improvement.

The investment bank turned triumphant with strong trading activities on high volatility during the first quarter, and a continued momentum in investment banking business, supporting the bottom-line numbers. In addition, investing & lending activities were strong. However, elevated expenses were an undermining factor.

Notably, the quarter witnessed improved market-making environment and increased client activity levels.

Net earnings applicable to common shareholders came in at $2.7 billion, up 27% year over year.

Revenues Improve, Expenses Escalate

Goldman’s net revenues were up 25% year over year to $10 billion in the quarter under review. Moreover, the revenue figure handily outpaced the Zacks Consensus Estimate of $8.9 billion.

Quarterly revenues, as per business segments, are as follows:

The Institutional Client Services division recorded revenues of $4.4 billion, up 31% year over year. The rise indicates elevated net revenues in Fixed Income, Currency and Commodities Client Execution revenues (up 23% year over year), driven by higher revenues from commodities, currencies and credit products, partly mitigated by lower revenues from interest rate and mortgage products.

Increase in equities client execution, securities service revenues, along with high commissions and fees, resulted in the upsurge in Equities revenues (up 38%).

The Investment Banking division generated revenues of $1.8 billion, up 5% year over year. Results highlight higher underwriting revenues (up 27%), aided by elevated debt and equity underwriting revenues. However, lower financial advisory revenues (down 22%) due to decreased industry-wide completed mergers and acquisition transactions were recorded.

The Investment Management division recorded revenues of $1.8 billion, up 18% year over year. The uptick was mainly driven by higher management and other fees, along with elevated transaction and incentive fees.

The Investing and Lending division’s revenues of $2.1 billion in the quarter came in 43% higher on a year-over-year basis. The upside stemmed from the surge in revenues from investments in equities and debt securities.

Total operating expenses flared up 21% year over year to $6.6 billion. Expenses moved up mainly due to rise in compensation and employee-benefit expenses (up 25%), and non-compensation expenses (up 14%).

Notably, lower net provisions for litigation and regulatory proceedings were recorded.

Strong Capital Position

Goldman displayed a robust capital position in the reported quarter. As of Mar 31, 2018, the company’s Common Equity Tier 1 ratio was 11.1% under the Basel III Advanced Approach, highlighting the valid transitional provisions. The figure was up from 10.7% recorded in the prior quarter.

The company’s supplementary leverage ratio, on a fully phased-in basis, was 5.7% at the end of the reported quarter, down from 5.8% reported in the previous quarter.

Return on average common shareholders’ equity, on an annualized basis, was 15.4% as of Mar 31, 2018.

Capital Deployment Update

During first-quarter 2018, the company repurchased 3 million shares of its common stock at an average price per share of $264.32 and a total cost of $800 million.

Concurrent with the earnings release, Goldman’s board of directors hiked the quarterly common stock dividend to 80 cents per share, up 6.7% from the prior payout. The new dividend will be paid on Jun 28 to common shareholders of record as on May 31, 2018.

Conclusion

Results of Goldman highlight an impressive quarter. Remarkable improvement in trading revenues, robust investment banking results and underwriting business drove revenue. The company’s well-diversified business, apart from its solid investment banking operations, continues to ensure earnings stability.

Its focus to capitalize on new growth opportunities through several strategic investments, including the digital consumer lending platform, will likely bolster overall business growth. However, costs stemming from brokerage and market development remain near- to medium-term headwinds.

The Goldman Sachs Group, Inc. Price, Consensus and EPS Surprise

The Goldman Sachs Group, Inc. Price, Consensus and EPS Surprise | The Goldman Sachs Group, Inc. Quote

Currently, Goldman carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Driven by top-line strength, Citigroup C delivered a positive earnings surprise of 4.3% in first-quarter 2018. Earnings per share of $1.68 for the quarter easily outpaced the Zacks Consensus Estimate of $1.61. Also, earnings compared favorably with the year-ago figure of $1.35 per share.

Overall high revenues were reflected, driven by elevated banking, equity markets and consumer banking revenues, along with loan growth. However, fixed income markets revenue disappointed. Moreover, expenses escalated on ongoing investments.

Wells Fargo WFC recorded positive earnings surprise of 4.7% in first-quarter 2018. Earnings of $1.12 per share surpassed the Zacks Consensus Estimate of $1.07. Additionally, results improved from the prior-year quarter earnings of $1.03.

Notably, results are preliminary which might be impacted on resolution of matters with Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC) related to the bank’s compliance risk-management program with a charge of $1 billion in civil money penalties.

Lower provisions and higher interest income aided results. However, elevated interest expense and reduced non-interest income with lower mortgage revenues were the undermining factors. Moreover, expenses soared. Furthermore, reduction in loans and deposits acted as headwinds for the quarter.

Among other Wall Street giants, U.S. Bancorp USB is scheduled to report first-quarter 2018 earnings on Apr 18.

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