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Goldman (GS) Q1 Earnings Beat, Advisory Revenues Improve

Zacks Equity Research

Reflecting the rank #1 in worldwide completed mergers and acquisitions, Goldman Sachs’ GS first-quarter 2019 results recorded a positive earnings surprise of 20.5%. The company reported earnings per share of $5.71, comfortably beating the Zacks Consensus Estimate of $4.74. However, the bottom line compares unfavorably with earnings of $6.95 per share recorded in the year-earlier quarter.

The stock declined nearly 2% in pre-market trading, indicating that investors have not considered the results in their favor. Notably, the full-day trading session will depict a better picture.

The investment bank turned triumphant with strong financial advisory revenues. Further, lower expenses reflected prudent expense management. However, lower Fixed Income, Currency and Commodities Client Execution (FICC) revenues, along with investment management revenues, were undermining factors. Also, lower underwriting revenues were a major drag.

Notably, improved market conditions were witnessed in the reported quarter, however, low levels of volatility and client activity were on the downside.

Revenues Decline, Expenses Down

Goldman’s net revenues were down 13% year over year to $8.8 billion in the quarter under review. In addition, the revenue figure lagged the Zacks Consensus Estimate of $9 billion.

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

The Institutional Client Services division recorded revenues of $3.6 billion, down 18% year over year. The fall indicates decrease in equities revenues (down 24%), backed by lower equities client execution (down 36%), commissions and fees (down 13%) and securities service revenues (down 14%).

Notably, lower net revenues in Fixed Income, Currency and Commodities Client Execution (down 11% year over year), impacted by reduced revenues from interest rate, currencies and credit products were recorded. These were partly mitigated by higher revenues from mortgages and commodities.

The Investing and Lending division’s revenues of $1.8 billion in the quarter under review came in 14% lower year over year. Decline in revenues from investments in equities, as well as debt securities & loans led to the downside.

The Investment Management division recorded revenues of $1.6 billion, down 12% year over year. The decline was mainly due to lower transaction and incentive fees, along with reduced management and other fees.

The Investment Banking division generated revenues of around $1.8 billion, up 1% year over year. Results highlight increased financial advisory revenues (up 51%). Notably, industry-wide completed mergers and acquisitions volumes went up. These were mostly offset by lower underwriting revenues (down 24%), aided by reduced equity and debt underwriting revenues.

Total operating expenses declined 11% year over year to $5.9 billion. Expenses dropped mainly due to fall in compensation and benefits expenses, along with reduced brokerage, clearing, exchange and distribution fees due to low activity levels. These declines were partly offset by elevated expenses for consolidated investments and technology.

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

Provision for credit losses was $224 million in the quarter, significantly higher than the $44 million in the prior-year quarter. Higher provisions are reflected related to the consumer loan portfolio.

Strong Capital Position

Goldman displayed a robust capital position in the reported quarter. As of Mar 31, 2019, the company’s Common Equity Tier 1 ratio was 13.4% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from 13.1% recorded in the prior quarter.

The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.4% at the end of the Jan-Mar quarter, up from 6.2% witnessed in the previous quarter.

Return on average common shareholders’ equity, on an annualized basis, was 11.1% in the reported quarter.

Capital Deployment Update

During first-quarter 2019, the company repurchased 6.3 million shares of its common stock at average price per share of $197.08 and a total cost of $1.25 billion.

Recently, Goldman announced an increased quarterly dividend of 85 cents per share, up 6.25%. The new dividend will be paid on Jun 27, to shareholders of record as of May 30, 2019.

Conclusion

Results of Goldman highlight an impressive quarter. Remarkable improvement in financial advisory business and lower expenses are likely to further aid revenues. The company’s well-diversified business, apart from its core 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. Nonetheless, costs rising from technology investments and market development remain near- to medium-term headwinds. Furthermore, muted fixed income trading activities are a concern.
 

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 #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Driven by prudent expense management, Wells Fargo WFC recorded a positive earnings surprise of 11.1% in first-quarter 2019. Earnings of $1.20 per share surpassed the Zacks Consensus Estimate of $1.08. Results also came in above the prior-year quarter adjusted earnings of $1.12. Higher net interest income and fall in expenses aided the company’s performance. However, reduced fee income was an undermining factor. Moreover, provisions soared. Further, reduction in loans and deposits acted as headwinds.

PNC Financial PNC reported positive earnings surprise of 0.8% in first-quarter 2019. Earnings per share of $2.61 surpassed the Zacks Consensus Estimate of $2.59. Further, the bottom line reflects a 7.4% jump from the prior-year quarter. Higher revenues, driven by easing margin pressure and escalating fee income, aided the results. However, rise in costs and provisions were headwinds.

Higher rates and improved investment banking performance drove JPMorgan’s JPM first-quarter 2019 earnings of $2.65 per share, which outpaced the Zacks Consensus Estimate of $2.32. Also, the figure was up 12% from the prior-year quarter. Investment banking fees recorded 9% growth with 12% rise in advisory fees and 21% increase in debt underwriting income, partially offset by 23% decline in equity underwriting fees. Decent loan growth (driven largely by rise in wholesale and credit card loans) and higher interest rates supported net interest income.

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