Goldman Sachs Group Inc.’s (GS) fourth quarter 2009 earnings of $8.20 per share were significantly ahead of the Zacks Consensus Estimate of $5.18. Results reflected strong performance in investment banking and increased inflows which offset the weak performance in the trading operations. The company also reported a significant drop in expenses on a sequential basis.

GAAP net income in the fourth quarter of 2009 was $4.8 billion compared to $3.0 billion or $5.25 per share in the prior quarter, and a loss of $2.3 billion or $4.97 per share in the prior-year quarter.

Total revenue decreased 22% sequentially but was significantly higher than the negative revenue in the prior-year period to $9.6 billion. Fourth quarter revenue by business segment are as follows:

Investment Banking generated revenue of $1.6 billion, up 82% sequentially and 58% year-over-year. Results reflected an increase in revenue of debt and equity underwriting. Also, revenues were spurred by the financial advisory business as a result of significant increase in high-yield client activity across the industry.

Trading and Principal Investments generated revenue of $6.4 billion, down 36% sequentially but significantly higher than the prior-year quarter. Sequentially results were down as a result of a decrease in revenues in fixed income (down 34%) and equity trading (down 45%). Even the Principal Investment portfolio declined 60% sequentially.

Asset Management and Securities Services generated revenue of $1.6 billion, up 8% sequentially but down 10% year-over-year. Results reflected higher incentive, management and other fees coupled by strong inflows in fixed income assets. This was partially offset by outflows in money market assets and market appreciation across all asset classes.

Operating expenses decreased 70% sequentially but were up 11% year-over-year to $2.2 billion. Expenses were down sequentially as a result of lower compensation and benefits spending during the quarter.

For full year 2009, total revenues increased 103% to $45.2 billion. Net income came in at $13.4 billion compared to $2.0 million in 2008, while diluted earnings per share was $22.13 compared to $4.47 in 2008. Goldman’s total employee compensation in 2009 was reduced by 20% or about $4 billion than 2007 levels, to about $16 billion, reflecting lower-than-expected compensation although it was up 47% from 2008. Return on average common shareholders’ equity (ROE) was 22.5% for 2009.

At Dec 31, 2009, Goldman’s Tier 1 capital ratio under Basel I was 15.0%, up from 14.5% as of Sep 25, 2009. Tier 1 common ratio under Basel I was 12.2% as of Dec 31, 2009, compared to 11.6% as of Sep 25, 2009. During the reported quarter, ROE on annualized basis increased substantially to 31.7% from 21.4% reported in the prior quarter.

Goldman’s book value per share improved 6% to $117.48 as compared to $110.75 as of Sep 25, 2009. Tangible book value per share increased 7% to $108.42 as compared to $101.39 as of Sep 25, 2009. Assets under management increased $23 billion to $871 billion in the quarter, due to $31 billion of market appreciation, primarily in equity and fixed income assets and also due to $12 billion of net inflows.

Dividend Update

During the third quarter, Goldman declared a dividend of $0.35 per common share to be paid on Mar 30, 2010 to common shareholders of record on Mar 2, 2010.

While peers such as Morgan Stanley (MS) and Citigroup Inc. (C) underperformed consensus estimates in their recent earnings releases, Goldman has performed better than the market expectations, surviving the financial crisis, and doing so strongly. The company benefited from less exposure to toxic mortgage-backed securities and increased client activity.

Although current litigation issues on consumer lending and higher bonus payments continue to bother Goldman, we believe the company is poised to grow significantly with its well-diversified business model and a more favorable operating environment. In all, we think Goldman’s sturdy capital and liquidity will lead to an increased profitability from newer opportunities once the economy recovers.

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