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Goldman (GS) Q2 Earnings Beat, FICC Revenues Disappoint

Zacks Equity Research

Reflecting the rank #1 in worldwide completed mergers and acquisitions, Goldman Sachs’ GS second-quarter 2019 results recorded a positive earnings surprise of 22.8%. The company reported earnings per share of $5.81, comfortably beating the Zacks Consensus Estimate of $4.73. However, the bottom-line figure compares unfavorably with earnings of $5.98 per share recorded in the year-earlier quarter.

The stock rose more than 1% in pre-market trading, indicating that investors have taken the results in their stride. Notably, the full-day trading session will depict a better picture.

The investment bank turned triumphant with strong investing and lending revenues, along with elevated equities revenues. Further, stable expenses reflect prudent expense management. However, lower Fixed Income, Currency and Commodities Client Execution (FICC) revenues, along with investment management revenues, were undermining factors. Also, lower financial advisory and underwriting revenues were major drags.

Notably, low levels of volatility and client activity were on the downside in the reported quarter.

Revenues Decline, Expenses Stable

Goldman’s net revenues were down 2% year over year to $9.5 billion in the reported quarter. The revenue figure, however, surpassed the Zacks Consensus Estimate of $8.7 billion.

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

The Institutional Client Services division recorded revenues of $3.5 billion, down 3% year over year. The downside indicates lower net revenues in Fixed Income, Currency and Commodities Client Execution (down 13% year over year), affected by reduced revenues from interest rate, currencies and credit products. These were partly mitigated by higher revenues from mortgages and commodities.

However, higher equities revenues (up 6%), backed by elevated equities client execution (up 12%), commissions and fees (up 2%) and securities service revenues (up 5%), were on the upside.

The Investment Management division recorded revenues of $1.6 billion, down 14% year over year. This decline was mainly due to lower transaction and incentive fees, partly offset by higher management and other fees.

The Investment Banking division generated revenues of around $1.9 billion, down 9% year over year. Results highlight decreased financial advisory revenues (down 3%) which reflects decline in industry-wide completed mergers and acquisitions activity. Furthermore, lower underwriting revenues (down 12%), aided by reduced equity and debt underwriting revenues, were recorded.

The Investing and Lending division’s revenues of $2.5 billion in the June-end quarter came in 16% higher year over year. Upsurge in revenues from investments in equities, as well as debt securities & loans led to this increase.

Total operating expenses remained stable year over year at $6.1 billion. Fall in compensation and benefits expenses were mostly 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 $214 million in the second quarter, down 9% year over year. Lower provisions are related to purchased credit impaired loans.

Strong Capital Position

Goldman displayed a robust capital position in the reported quarter. As of Jun 30, 2019, the company’s Common Equity Tier 1 ratio was 13.8% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior quarter’s 13.7%.

The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.4% at the end of the April-June quarter, in line with the previous quarter.

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

Capital Deployment Update

During second-quarter 2019, the company repurchased 6.2 million shares of its common stock at an average price per share of $200.73 and a total cost of $1.25 billion, and paid around $319 million of common stock dividends.

Recently, Goldman announced an increased quarterly dividend of $1.25 per share, up 47%. The new dividend will be paid on Sep 27, to shareholders of record as of Aug 30, 2019.

Conclusion

Results of Goldman highlight an impressive quarter. Remarkable improvement in investing and lending business, along with lower expenses, are likely to further fuel revenue growth. 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. price-consensus-eps-surprise-chart | 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 Major Banks

Citigroup C kick started the earnings season and delivered a positive earnings surprise of 2.8% in the second quarter, backed by expense control. Adjusted earnings per share of $1.83 for the quarter handily outpaced the Zacks Consensus Estimate of $1.78. Also, earnings climbed 12% year over year.

Citigroup displayed prudent expense management and higher revenues riding on consumer banking during the reported quarter. Further, loan and deposit growth were positives. However, fixed income revenues, excluding the Tradeweb gain, disappointing investment banking revenues on lower advisory business and reduced equity underwriting, partly offset by higher debt underwriting fees were on the downside.

This apart, lower equity market revenue amid challenging trading environment reflected reduced volumes and client activity levels.

Among others, Bank of America Corporation BAC and U.S. Bancorp USB are scheduled to report their quarterly numbers on Jul 17.

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