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Goldman Sachs (GS) Q4 Earnings Disappoint, Expenses Flare Up

Zacks Equity Research

Goldman Sachs GS reported a negative earnings surprise of 9.8% in fourth-quarter 2019. The company posted earnings per share of $4.69, missing the Zacks Consensus Estimate of $5.20. Further, the bottom-line figure compares unfavorably with earnings of $6.04 per share recorded in the year-earlier quarter.

The stock declined around 1% in pre-market trading, reflecting investors’ disappointment with the results. Notably, the full-day trading session will depict a clearer picture.

The investment bank disappointed with rise in operating expenses and provisions. Moreover, lower financial advisory and corporate lending revenues were on the downside. However, strong underwriting business and higher Fixed Income, Currency and Commodities Client Execution (FICC) revenues provided some respite. In addition, wealth management and consumer banking business reported an upswing.

For full-year 2019, net income per share of $21.03 came in lower than the year-ago earnings of $25.27. Earnings also lagged the Zacks Consensus Estimate of $24.07. Results included impact of $3.16 related to net provisions for litigation and regulatory proceedings during the year.

Revenues Improve, Expenses Up

For full-year 2019, the company reported revenues of $36.5 billion, almost stable year over year. Nevertheless, revenues managed to beat the Zacks Consensus Estimate of $35.3 billion.

Goldman’s net revenues were up 23% year over year to $10 billion in the reported quarter. The revenue figure also beat the Zacks Consensus Estimate of $8.8 billion.

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

The Global Markets division recorded revenues of $3.5 billion, up 33% year over year. This upside indicates higher net revenues in Fixed Income, Currency and Commodities Client Execution (up 63% year over year), driven by elevated revenues from interest rate, mortgages and commodities. Further, FICC financing was on the upside.

Furthermore, higher equities revenues (up 12%) were recorded, backed by elevated equities intermediation and financing.

The Asset Management division recorded revenues of $3 billion, up 52% year over year. This upside mainly stemmed from elevated equity investments and lending, along with management and other fees, partially mitigated by lower Incentive fees.

The Consumer and Wealth Management division’s revenues of $1.4 billion in the December-end quarter came in 8% higher year over year. Increased revenues from wealth management (up 6%) and consumer banking (up 23%) led to this upsurge.

The Investment Banking division generated revenues of around $2.06 billion, down 6% year over year. Results suggest decreased financial advisory revenues (down 29%), which reflects a decline in industry-wide completed mergers and acquisition activities. Also, corporate lending disappointed with an 8% decline. However, higher underwriting revenues (up 31%), aided by elevated equity and debt underwriting revenues, were on the upside.

Total operating expenses flared up around 42% year over year at $7.3 billion. Rise in almost all components of expenses resulted in this upswing.

Notably, higher net provisions for litigation and regulatory proceedings of $1.9 billion were recorded.

Provision for credit losses was $336 million in the fourth quarter, up 51% year over year. Higher provisions are related to rise in impairments.

Strong Capital Position

Goldman displayed a robust capital position in the reported quarter. As of Dec 31, 2019, the company’s Common Equity Tier 1 ratio was 13.7% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior-year quarter’s 13.1%.

The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.2% at the end of the October-December quarter, in line with the prior-year quarter.

Return on average common shareholders’ equity, on an annualized basis, was 8.7% in the quarter and 10% for 2019.

Capital Deployment Update

During 2019, Goldman repurchased 25.8 million shares of its common stock at an average price per share of $206.56 and a total cost of $5.34 billion and paid around $1.54 billion of common stock dividends.

Notably, during fourth-quarter 2019, the company repurchased 10.2 million shares of its common stock at an average price per share of $212.67 and a total cost of $2.16 billion, and paid around $453 million of common stock dividends.

Conclusion

Goldman’s results highlight a disappointing quarter. Downtrend in financial advisory and corporate lending revenues are likely to impede revenue growth. Nonetheless, strong underwriting business and fixed income revenues remain on the upside. Also, 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.
 

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

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 delivered a positive earnings surprise of 4.4% in fourth-quarter, backed by revenue strength. Adjusted earnings per share of $1.90 for the quarter handily outpaced the Zacks Consensus Estimate of $1.82. Including one-time gain, net income was $5 billion or $2.15 per share compared with the $4.3 billion or $1.64 per share recorded in the prior-year quarter.

Citigroup recorded higher revenues riding on consumer banking, investment banking and market revenues during the reported quarter. Though equity market revenues disappointed on a more challenging environment in derivatives, fixed income revenues were on an upswing. Moreover, investment banking revenues increased on strong underwriting business, partly muted by lower advisory business. Further, loans escalated. However, rise in expenses was on the downside. Additionally, cost of credit soared.

Wells Fargo’s WFC fourth-quarter adjusted earnings of 93 cents per share lagged the Zacks Consensus Estimate of $1.12, on lower net interest income and rise in expenses. Results exclude litigation accruals. Including litigation accruals (not tax-deductible) worth 33 cents per share related to certain matters, earnings came in at 60 cents per share compared with the prior-year quarter’s $1.21.

Reduced net interest income on lower rates and rise in expenses negatively impacted the results. Moreover, provisions soared. However, higher fee income, driven by improved mortgage banking business, was on the upside. Further, escalation in loans and deposits acted as tailwinds.

Better-than-expected trading performance and rise in mortgage banking fees drove JPMorgan’s JPM fourth-quarter earnings of $2.57 per share, which handily outpaced the Zacks Consensus Estimate of $2.32. Lower interest rates drove mortgage banking fees. Further, as expected, both equity and debt underwriting fees improved, rising 10% and 11%, respectively. Thus, this resulted in an increase in investment banking fees (up 5%) despite a 3% fall in advisory fees.

Also, fixed income markets revenues surged 86%, given a favorable comparison against a soft prior-year quarter performance and strong client activity across products. Likewise, equity markets revenues grew 15% driven by strong equity markets performance.

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Click to get this free report Wells Fargo & Company (WFC) : Free Stock Analysis Report JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report Citigroup Inc. (C) : Free Stock Analysis Report The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research