Goldman Sachs: Not a Great Quarter, But Moving In the Right Direction

How Goldman Sachs Won Big on Earnings
How Goldman Sachs Won Big on Earnings

Goldman Sachs missed estimates on both earnings and revenue, but the news isn’t all bad.

Goldman Sachs (NYSE:GS) reported its third quarter earnings on Wednesday, October 15, and the numbers weren’t great. Not only did the company miss expectations on the top and bottom lines, but bad market performance and global uncertainty caused revenue to fall by 24% from the second quarter.

However, there was some good news, particularly from a long-term perspective. Here’s what you need to know about Goldman’s earnings, and where the company may be heading from here.

The numbers don’t look too good…
Goldman Sachs missed expectations on both the top and bottom lines with earnings of $2.90 per share on $6.86 billion in revenue failing to match analyst estimates of $2.91 and $7.13 billion, respectively.

And, most of Goldman Sachs’ individual businesses saw revenue decline as well. Institutional Client Services’ revenue fell 15% year over year on a 33% drop in fixed income, currency, and commodity trading revenue. The Investment Management business experienced a slight drop, and the Investing & Lending segment saw revenue plunge by 60%, as would be expected considering the overall stock market’s performance during the quarter.

In fact, the Investment Banking segment was the only one to post a year-over-year revenue increase, but that was mainly due to the industry-wide increase in completed mergers and acquisitions. Underwriting revenue actually fell by 14%, which makes sense since fewer companies issue IPOs and secondary offerings when market conditions get rough.

Here’s how Goldman’s revenue numbers compare to last year, as well as to the previous quarter.

…but the long-term plan seems to be on track
Despite the lower revenue, there were a few reasons for long-term Goldman investors to smile. For starters, Goldman ranked first in announced and completed M&A, as well as equity offerings year-to-date. And, the Investment Banking business produced its highest revenue through three quarters since 2007.

One figure I was particularly glad to see was the performance of the Investment Management business. Revenue was down slightly as I mentioned earlier, but the bigger story was that Goldman’s assets under supervision actually increased by $6 billion to an all-time high of $1.19 trillion. It accomplished this during a quarter when the market fell by more than 7% thanks to net inflows of $41 billion. In other words, even though market conditions haven’t been great, Goldman’s clients are still investing more than they’re taking out. And, more assets under management translates to a higher ability to generate commissions and fees in the future.

Finally, Goldman’s capital levels continue to improve. The bank’s Standardized Common Equity Tier 1 ratio of 12.4% and its Basel III Advanced Common Equity Tier 1 ratio (essentially ways to measure how financially strong a bank is) of 12.7% was an improvement from 11.8% and 12.5%, respectively, in the second quarter.

The Foolish bottom line
Any investment bank can have a bad quarter when economic conditions are unfavorable, and that’s exactly what we’ve seen with Goldman’s peers like JPMorgan Chase. In fact, JPMorgan’s revenue fell in all of its business divisions except for Consumer and Community Banking (CCB).

And, just like we saw with JPMorgan, none of the negative catalysts this quarter are due to permanent issues, or anything that Goldman is doing wrong. On the contrary, most of the data that reflects Goldman’s long-term potential to grow looks rather promising.


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