Goldman Sachs Crushes Earnings

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Investment banking giant Goldman Sachs just released its Q1 financial results.

The bank beat earnings and revenue forecasts.

For Q1, the bank posted adjusted EPS of $4.29, versus analysts' estimates of $3.87. 

Revenue for the first quarter came in at $10.09 billion versus analysts' estimates of $9.65 billion. 

The stock was last trading up more than 1% in the pre-market.

Here's an excerpt from the earnings release: 

The Goldman Sachs Group, Inc. (GS) today reported net revenues of $10.09 billion and net earnings of $2.26 billion for the first quarter ended March 31, 2013. Diluted earnings per common share were $4.29 compared with $3.92 for the first quarter of 2012 and $5.60 for the fourth quarter of 2012. Annualized return on average common shareholders’ equity (ROE) was 12.4% for the first quarter of 2013.

Highlights

  • Goldman Sachs continued its leadership in investment banking, ranking first in worldwide completed mergers and acquisitions for the year-to-date. 
  • The firm ranked first in worldwide equity and equity-related offerings, common stock offerings and initial public offerings for the year-to-date. (2)
  • Debt underwriting produced record quarterly net revenues of $694 million.
  • Book value per common share and tangible book value per common share both increased approximately 3% during the quarter to $148.41 and $138.62, respectively.
  • The firm continues to manage its liquidity and capital conservatively. The firm’s global core excess liquidity was $174 billion as of March 31, 2013. In addition, the firm’s Tier 1 capital ratio was 14.4% and the firm’s Tier 1 common ratio was 12.7% as of March 31, 2013, in each case under Basel 1 and reflecting the revised market risk regulatory capital requirements which became effective on January 1, 2013.

“We are pleased with our performance for the quarter,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. “Our strong client franchise across our businesses drove generally solid results. Still, the potential for macro-economic instability was felt in the quarter and constrained overall corporate and investor activity. We continue to be very focused on controlling our costs and efficiently managing our capital.”

Net Revenues

Investment Banking

Net revenues in Investment Banking were $1.57 billion for the first quarter of 2013, 36% higher than the first quarter of 2012 and 12% higher than the fourth quarter of 2012. Net revenues in Financial Advisory were $484 million, essentially unchanged compared with the first quarter of 2012. Net revenues in the firm’s Underwriting business were $1.08 billion, 63% higher than the first quarter of 2012. This increase primarily reflected significantly higher net revenues in debt underwriting, due to leveraged finance and commercial mortgage-related activity. Net revenues in equity underwriting were also significantly higher compared with the first quarter of 2012, reflecting an increase in client activity. The firm’s investment banking transaction backlog decreased compared with the end of 2012. (8)

Institutional Client Services

Net revenues in Institutional Client Services were $5.14 billion, 10% lower than the first quarter of 2012 and 18% higher than the fourth quarter of 2012.

Net revenues in Fixed Income, Currency and Commodities Client Execution were $3.22 billion, 7% lower than the first quarter of 2012. Net revenues were lower across most businesses, primarily reflecting significantly lower net revenues in interest rate products compared with a strong first quarter of 2012. Net revenues in mortgages were higher compared with the first quarter of 2012. During the quarter, Fixed Income, Currency and Commodities Client Execution operated in an environment characterized by generally tighter credit spreads and improved client activity levels compared with the fourth quarter of 2012.

Net revenues in Equities were $1.92 billion, 15% lower than the first quarter of 2012, primarily reflecting lower net revenues in equities client execution. This decrease reflected significantly lower net revenues in derivatives compared with a strong first quarter of 2012, partially offset by higher net revenues in cash products. Commissions and fees were lower compared with the first quarter of 2012, reflecting lower market volumes. In addition, securities services net revenues were lower compared with the first quarter of 2012. During the quarter, Equities operated in an environment generally characterized by an increase in global equity prices, lower volatility levels and improved client activity levels compared with the fourth quarter of 2012.

The net loss attributable to the impact of changes in the firm’s own credit spreads on borrowings for which the fair value option was elected was $77 million ($42 million and $35 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for the first quarter of 2013, compared with a net loss of $224 million ($117 million and $107 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for the first quarter of 2012.

Investing & Lending

Net revenues in Investing & Lending were $2.07 billion for the first quarter of 2013. Investing & Lending net revenues were positively impacted by an increase in equity prices and generally tighter credit spreads. Results for the first quarter of 2013 included a gain of $24 million from the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), net gains of $1.10 billion from other investments in equities, primarily in private equities, net gains and net interest income of $566 million from debt securities and loans, and other net revenues of $375 million related to the firm’s consolidated investments.

Investment Management

Net revenues in Investment Management were $1.32 billion for the first quarter of 2013, 12% higher than the first quarter of 2012 and 13% lower than the fourth quarter of 2012. The increase in net revenues compared with the first quarter of 2012 was due to higher incentive fees and higher management and other fees. During the quarter, assets under supervision (9) increased $3 billion to $968 billion, reflecting net market appreciation of $12 billion, primarily in equity assets. Net outflows in assets under supervision were $9 billion, as outflows in money market assets and, to a lesser extent, alternative investment assets, were partially offset by inflows in fixed income and equity assets.

Expenses

Operating expenses were $6.72 billion, essentially unchanged compared with the first quarter of 2012 and 36% higher than the fourth quarter of 2012.

Compensation and Benefits

The accrual for compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as benefits) was $4.34 billion for the first quarter of 2013, essentially unchanged compared with the first quarter of 2012. The ratio of compensation and benefits to net revenues for the first quarter of 2013 was 43.0%, compared with 44.0% for the first quarter of 2012. Total staff (10) decreased 1% compared with the end of 2012.

Non-Compensation Expenses

Non-compensation expenses were $2.38 billion, essentially unchanged compared with the first quarter of 2012 and 19% lower than the fourth quarter of 2012. Non-compensation expenses for the first quarter of 2013 included lower depreciation and amortization expenses, primarily reflecting lower impairment charges related to consolidated investments, compared with the first quarter of 2012. This decrease was largely offset by higher other expenses, primarily reflecting increased net provisions for litigation and regulatory proceedings and higher expenses related to consolidated investments. The first quarter of 2013 included net provisions for litigation and regulatory proceedings of $110 million.

Provision for Taxes

The effective income tax rate for the first quarter of 2013 was 33.0%, essentially unchanged from the full year tax rate of 33.3% for 2012.

Capital

As of March 31, 2013, total capital was $244.24 billion, consisting of $77.23 billion in total shareholders’ equity (common shareholders’ equity of $71.03 billion and preferred stock of $6.20 billion) and $167.01 billion in unsecured long-term borrowings. Book value per common share was $148.41 and tangible book value per common share (3) was $138.62, both approximately 3% higher compared with the end of 2012. Book value and tangible book value per common share are based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 478.6 million as of March 31, 2013.

On March 25, 2013, the firm amended its warrant agreement with Berkshire Hathaway to require net share settlement and to specify the exercise date as October 1, 2013. Under the amended agreement, the firm will deliver to Berkshire Hathaway the number of shares of common stock equal in value to the difference between the average closing price of the firm’s common stock over the 10 trading days preceding October 1, 2013 and the exercise price of $115 multiplied by the number of shares of common stock (43.5 million) covered by the warrant.

During the quarter, the firm repurchased 10.1 million shares of its common stock at an average cost per share of $150.53, for a total cost of $1.52 billion. On April 15, 2013, the Board of Directors of The Goldman Sachs Group, Inc. (Group Inc.) authorized the repurchase of an additional 75.0 million shares of common stock pursuant to the firm’s existing share repurchase program. The remaining share authorization under the firm’s existing repurchase program, including the newly authorized amount, is 86.4 million shares. (11)

Under the regulatory capital requirements currently applicable to bank holding companies, the firm’s Tier 1 capital ratio (6) was 14.4% (5) and the firm’s Tier 1 common ratio (7) was 12.7% (5) as of March 31, 2013, in each case under Basel 1 and reflecting the revised market risk regulatory capital requirements which became effective on January 1, 2013. As of December 31, 2012, the firm’s Tier 1 capital ratio under Basel 1 was 16.7% and the firm’s Tier 1 common ratio under Basel 1 was 14.5% (prior to the implementation of the revised market risk regulatory capital requirements).

Other Balance Sheet and Liquidity Metrics

  • The firm’s global core excess liquidity (GCE) (4) was $174 billion (5) as of March 31, 2013 and averaged $181 billion (5) for the first quarter of 2013, compared with an average of $173 billion for the fourth quarter of 2012.
  • Total assetswere $959 billion (5) as of March 31, 2013, compared with $939 billion as of December 31, 2012.
  • Level 3 assetswere $46 billion (5) as of March 31, 2013, compared with $47 billion as of December 31, 2012, and represented 4.8% of total assets.

Dividends

Group Inc. declared a dividend of $0.50 per common share to be paid on June 27, 2013 to common shareholders of record on May 30, 2013. The firm also declared dividends of $229.17, $387.50, $244.44, $244.44 and $371.88 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series I Preferred Stock, respectively (represented by depositary shares, each representing a 1/1,000th interest in a share of preferred stock), to be paid on May 10, 2013 to preferred shareholders of record on April 25, 2013. In addition, the firm declared dividends of $1,044.44 per each share of Series E Preferred Stock and Series F Preferred Stock, to be paid on June 3, 2013 to preferred shareholders of record on May 19, 2013.

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This comes in the wake of announcement from JP Morgan, Wells Fargo, and Citigroup.  All three banks beat expectations.



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