The Goldman Sachs Group Inc. (GS) reported its first-quarter 2012 earnings per share of $3.92, significantly surpassing the Zacks Consensus Estimate of $3.55 per share. Moreover, the reported earnings almost doubled the prior quarter’s earnings of $1.84 per share.
Amid the improving economy and global markets, the results were driven by increases in investment banking revenues and equity trading. Moreover, higher client activity levels added fuel to the fire. Higher operating expenses were on the downside.
Net income applicable to common shareholders in the quarter was $2.1 billion, up from $978 million recorded in the prior quarter.
Performance in Detail
Total revenue of Goldman increased 65% from the prior quarter to $9.9 billion, resulting from an increase in overall businesses, partially offset by a decline in investment management revenues. Moreover, rise in global equity prices and tighter credit spreads during the quarter were positives for the bank. Revenue also outpaced the Zacks Consensus Estimate of $9.1 billion.
Quarterly revenue, as per business segments, are as follows:
Investment Banking division generated revenues of $1.2 billion, up 35% sequentially. Results reflected higher-than-expected revenues from both debt and equity underwriting, along with an increase in revenues from the financial advisory business.
Institutional Client Services division recorded revenues of $5.7 billion, jumping 87% sequentially. Results improved due to outstanding performance in Fixed Income, Currency and Commodities (FICC). Moreover, rise in equity trading revenues (up 100% sequentially) due to higher commissions and fees, added to the improvement. In the first quarter of 2012, global equity prices increased and the sector enjoyed lower volatility levels compared to the fourth quarter of 2011.
Investing and Lending division booked revenues of $1.9 billion in the quarter. Results principally reflected a gain of $169 million from Goldman’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), coupled with net gains of $891 million from other investments in equity securities and other net revenues of $266 million. These gains were coupled with net gains and net interest of $585 million from debt securities and loans.
However, Investment Management division generated revenues of $1.2 billion, down 7% sequentially. The sequential decline mainly reflected lower incentive, management and other fees, partly offset by higher transaction revenues.
In the first quarter of 2012, operating expenses leaped 41% to $6.8 billion compared with the prior quarter. However, lower non-compensation expenses offset the considerable rise in expenses to some extent.
Non-compensation expenses were $2.4 billion in the quarter, down 8% sequentially. Expenses decreased largely due to declines in market development, occupancy and other expenses, offset by higher insurance reserves and increased brokerage, clearing, exchange and distribution fees.
Evaluation of Capital
As of March 31, 2012, Goldman’s Tier 1 capital ratio under Basel I was 14.7%, up from 13.8% in the prior quarter. Tier 1 common ratio under Basel I was 12.9%, improving from 12.1% in the prior quarter.
Return on common shareholders’ equity, on an annualized basis, was 12.2%. Goldman’s book value per share and tangible book value per share surged to $134.48 and $123.94 from $130.31 and $119.72 respectively, at the end of 2011.
Assets under management (AUM) declined to $824 billion in the quarter compared with $828 billion in the prior quarter, with $22 billion of net market appreciation and $26 billion of net outflows.
Share Repurchase and Dividend Update
During first-quarter 2012, Goldman repurchased 3.3 million shares of its common stock at an average cost per share of $111.28 and a total cost of $362 million.
Goldman increased its quarterly dividend to 46 cents per share from 35 cents. The dividend will be paid on June 29, 2012 to common shareholders of record as of May 31, 2012.
Performance by Peers
Citigroup Inc. (C), one of the peers of Goldman, reported mixed results in the first quarter. First-quarter 2012 earnings came in at 95 cents per share on revenues of $19.4 billion. It was impacted by accounting charges though it modestly benefited from its recent stake sale activities and increasing global consumer banking as well as transaction services revenues.
Another peer of the company, JPMorgan Chase & Co.‘s (JPM) first-quarter earnings per share of $1.31 topped the Zacks Consensus Estimate of $1.17. This also compares favorably with $1.28, earned in the prior-year quarter. JPMorgan’s better-than-expected earnings signal good performance of the sector as it has exposure in almost all banking businesses. Marked recovery of the bond and equity market as well as consequent revenue growth, which helped JPMorgan to bounce back, should lift the results of other mega-banks during the quarter.
One of the company’s strongest contenders, Morgan Stanley (MS), will be releasing its first-quarter 2012 earnings on April 19, 2012.
Our Viewpoint
Overall, the results of Goldman improved, mainly driven by equity and debt underwriting revenues in the improving economic environment. We expect Goldman to benefit from its well-managed global franchise, strong capital base, and industry leading position in trading and asset management.
Although the company has reported remarkable profits, increased operating expenses remain a matter of concern. Moreover, regulatory issues, including lawsuits and the fundamental pressures on the banking sector, are expected to dent the financials of the company in the upcoming quarters.
In Conclusion
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 a strong balance sheet.
Also, from the risk perspective it is for sure that the company would be able to withstand another financial crisis as Goldman cleared the most difficult stress test.
Moreover, one can consider a company like Goldman as value investment due to its steady dividend-yielding nature. Concurrent with the earnings release, the company also announced the increase in its quarterly dividend, instilling investors’ confidence.
Goldman currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain our long-term “Neutral” rating on the stock.
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