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Impressive 2Q Earnings for Goldman

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The Goldman Sachs Group, Inc.’s (GS) second-quarter 2013 earnings per share came in at $3.70, significantly surpassing the Zacks Consensus Estimate of $2.81. Moreover, the reported earnings outpaced the year-ago figure of $1.78 per share.

Amid challenging global markets, better-than-expected results were driven by Goldman’s record revenues with an elevation in client activity. Moreover, the company’s strong capital position was a positive. However, increased operating expenses reflect undisciplined expense management.

Net income applicable to common shareholders in the quarter was $1.9 billion, significantly up from $927 million recorded in the prior-year quarter.

Performance in Detail

Goldman’s net revenue surged 30% year over year to $8.6 billion in the quarter under review. Revenues were positively driven by improvement in all business segments. Revenues also comfortably surpassed the Zacks Consensus Estimate of $8.2 billion.

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

Investment Banking division generated revenues of $1.6 billion, up 29% year over year. Results reflected higher-than-expected revenues from underwriting business (up 45% year over year). Elevated revenues in equity underwriting reflected an augmentation in client activity, while debt underwriting surged, driven by leveraged finance activity.

Institutional Client Services division recorded revenues of $4.3 billion, up 11% year over year. Results were driven by higher revenues in Fixed Income, Currency and Commodities Client Execution (:FICC), marked by increased net revenues in currencies, credit products and commodities. Lower net revenues in mortgages and interest rate products were on the downside.

A rise in equity trading revenues (up 9% year over year) was recorded, due to higher net revenues in equities client execution and elevated commissions and fees.

Investing and Lending division booked revenues of $1.4 billion in the quarter, significantly up from $203 million in the prior-year quarter. Results principally reflected net gains of $462 million from investments in equities, net interest income and net gains of $658 million from debt securities and loans coupled with other net revenues of $295 million.

However, Goldman vended its residual investment in the ordinary shares of Industrial and Commercial Bank of China Limited (:ICBC).

Investment Management division generated revenues of $1.3 billion, in line with the prior-year quarter. Results reflected increased management and other fees along with elevated transaction revenues, offset by reduced incentive fees.

However, operating expenses ascended 14% to $6.0 billion compared with the prior-year quarter. Expenses increased largely due to elevated compensation and employee benefits expense.

Non-compensation expenses were $2.3 billion in the quarter, down 1% year over year. Additionally, results included net provisions of $149 million for litigation and regulatory proceedings.

Evaluation of Capital

Goldman exhibited a strong capital position in the reported quarter. As of Jun 30, 2013, Goldman’s Tier 1 capital ratio and Tier 1 common ratio under Basel I was 15.6% and 13.5% compared with 14.4% and 12.7%, respectively, in the prior quarter, reflecting revised market risk regulatory capital requirements, which became effective on Jan 1, 2013.

Return on average common shareholders’ equity, on an annualized basis, was 10.5% in the reported quarter as compared with 12.4% in the prior quarter. Goldman’s book value per share and tangible book value per share surged to $151.21 and $141.62, from $148.41 and $138.62 respectively, at the end of the prior quarter.

Assets under supervision increased to $955 billion in the quarter compared with $916 billion in the prior-year quarter and recorded net market depreciation of $11 billion and net outflows of $2 billion.

Capital Deployment Update

During second-quarter 2013, Goldman repurchased 10.5 million shares of its common stock at an average price per share of $152.80 and a total cost of $1.6 billion. Notably, on Apr 15, 2013, the board of directors at Goldman authorized the buy back of an additional 75.0 million shares of common stock pursuant to the company’s existing share repurchase program.

Remaining share authorization under Goldman’s existing repurchase program, including new authorization stands at 75.9 million shares.

Concurrent with the earnings release, Goldman declared its quarterly dividend of 50 cents per share. The dividend will be paid on Sep 27, 2013 to common shareholders of record as of Aug 30, 2013.

Our Viewpoint

Overall, Goldman’s results improved significantly compared to the prior-year period, mainly driven by top-line growth. However, increased operating expenses were on the downside. Additionally, regulatory issues, including lawsuits and the market's volatility, remain concerns.

We expect Goldman to benefit from its well-managed global franchise, strong capital base, and recent investments in the near future.

In Conclusion

The positive developments of the sector and gradually improving macroeconomic elements helped the banking behemoth maintain its illustrious track record.

Though there are concerns related to the impact of legal issues and its global exposure, equity-centric activities in the U.S. are expected to support Goldman’s results in the upcoming quarters with continued recovery in the capital markets.

An investor with an appetite to absorb risks related to the market volatility should not be disappointed with an investment in Goldman over the long haul. Goldman’s fundamentals remain highly promising with a diverse business model and strong balance sheet.

Moreover, Goldman is justly considered to be a value investment due to its steady dividend-yielding nature. Goldman currently carries a Zacks Rank #3 (Hold).

Among other Wall Street big shots, Wells Fargo & Company (WFC) achieved the 14th consecutive quarter of growth in earnings per share by reporting earnings of 98 cents per share in second-quarter 2013. Results improved from earnings per share of 92 cents in the prior quarter and 82 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by a nickel.

Results at Wells Fargo reflected growth in total loans and deposits amid a challenging economy and prudent expense management. Moreover, a strong capital position and returns on assets and equity acted as positives. It also reported $500 million in reserve release (pre-tax), attributable to improved credit performance. However, the company experienced a fall in non-interest income.

Further, we look forward to the results of Bank of America Corporation (BAC) on Jul 17, while Morgan Stanley (MS) will report on Jul 18.

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