Goldman (GS) Q3 Earnings Beat on Record Revenues, Costs Up
Reflecting the highest strong year-to-date net revenues in eight years, Goldman Sachs’ GS third-quarter 2018 results recorded a positive earnings surprise of 15.9%. The company reported earnings per share of $6.28, comfortably beating the Zacks Consensus Estimate of $5.42. Further, the bottom line witnessed 25.1% year-over-year improvement.
The investment bank turned triumphant with strong equity underwriting revenues aiding continued momentum in investment banking business, supporting the bottom-line numbers. In addition, Investment Management business was strong. However, lower Fixed Income, Currency and Commodities (FICC) Client Execution revenues and elevated expenses were undermining factors.
Notably, the company witnessed low client activity level amid low levels of volatility in the Sep-end quarter.
Net earnings applicable to common shareholders came in at $2.5 billion, up 21% year over year.
Revenues Improve, Expenses Escalate
Goldman’s net revenues were up 4% year over year to $8.6 billion in the quarter under review. In addition, the revenue figure handily outpaced the Zacks Consensus Estimate of $8.4 billion.
Quarterly revenues, as per business segments, are as follows:
The Investment Banking division generated revenues of around $2 billion, up 10% year over year. Results highlight higher underwriting revenues (up 20%), aided by elevated equity underwriting revenues, partly offset by lower debt underwriting revenues. Notably, net revenues from initial public offerings escalated. Furthermore, increased financial advisory revenues (up 1%) were recorded.
The Investment Management division recorded revenues of $1.7 billion, up 12% year over year. The uptick was mainly driven by higher management and other fees, along with elevated transaction and significant incentive fees.
The Institutional Client Services division recorded revenues of $3.1 billion, down 1% year over year. The fall indicates lower net revenues in Fixed Income, Currency and Commodities Client Execution revenues (down 10% year over year), impacted by reduced revenues from interest rate products, along with credit products and mortgages, partly offset by elevated net revenues in commodities and currencies.
Increase in equities client execution and securities service revenues was partly offset by lower commissions and fees, resulting in higher Equities revenues.
The Investing and Lending division’s revenues of $1.9 billion in the quarter under review came in 1% lower on a year-over-year basis. The downside stemmed from the decline in revenues from investments in equities, partially muted by lower revenues from debt securities & loans.
Total operating expenses flared up 4% year over year to $5.6 billion. Expenses moved up mainly due to rise in non-compensation expenses (up 14%), partly offset by lower compensation expenses (down 3%).
Notably, higher net provisions for litigation and regulatory proceedings, and market development expenses were recorded.
Strong Capital Position
Goldman displayed a robust capital position in the reported quarter. As of Sep 30, 2018, the company’s Common Equity Tier 1 ratio was 12.4% under the Basel III Advanced Approach, highlighting the valid transitional provisions. The figure was up from 11.5% recorded in the prior quarter.
The company’s supplementary leverage ratio, on a fully phased-in basis, was 6% at the end of the July-Sep quarter, up from 5.8% witnessed in the previous quarter.
Return on average tangible common shareholders’ equity, on an annualized basis, was 13.8% as of Sep 30, 2018.
Results of Goldman highlight an impressive quarter. Remarkable improvement in investment banking results and underwriting business drove revenues. The company’s well-diversified business, apart from its solid 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 brokerage and market development remain near- to medium-term headwinds. Further, muted trading activities are a concern.
Currently, Goldman carries a Zacks Rank #4 (Sell).
Performance of Other Banks
Driven by expense management, Citigroup C delivered a positive earnings surprise of 4.8% in third-quarter 2018. Earnings from continuing operations per share of $1.74 for the quarter handily outpaced the Zacks Consensus Estimate of $1.66. Also, earnings climbed 22.5% year over year.
Higher consumer banking, equity markets and fixed income market revenues, along with loan growth were witnessed. Though investment banking revenues disappointed as strong advisory business was more than offset by lower underwriting fees on low client activity, reduced expenses and credit costs acted as tailwinds.
Impacted by lower mortgage banking revenues, Wells Fargo WFC recorded a negative earnings surprise of 3.4% in third-quarter 2018. Earnings of $1.13 per share missed the Zacks Consensus Estimate of $1.17. However, the bottom-line compared favorably with 83 cents recorded in the prior-year quarter.
Lower provisions and higher net interest income aided results. Moreover, expenses declined. However, reduced fee income was an undermining factor. Further, reduction in loans and deposits acted as headwinds in the quarter
Among other Wall Street giants, U.S. Bancorp USB is scheduled to report third-quarter 2018 earnings on Oct 17.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it’s predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce “the world’s first trillionaires,” but that should still leave plenty of money for regular investors who make the right trades early.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Citigroup Inc. (C): Free Stock Analysis Report
U.S. Bancorp (USB): Free Stock Analysis Report
Wells Fargo & Company (WFC): 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