Goldman Q1 Earnings Beat Ests, Down Y/Y - Analyst Blog

Following the slump in total net revenues, The Goldman Sachs Group, Inc.'s GS first-quarter 2014 earnings per share came in at $4.02, significantly below the year-ago figure of $4.29. However, it surpassed the Zacks Consensus Estimate of $3.43.

Shares of Goldman increased more than 2% in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the full trading session will give a fair idea whether Goldman has been able to meet market expectations.

Lower top-line performance was a negative for the quarter. However, the company's robust financial advisory revenues and steady capital deployment activities were the positives. Further, decreased expenses exhibited prudent expense management.

Net income applicable to common shareholders in the quarter was $1.9 billion, declining 11% from $2.2 billion recorded in the prior-year quarter.

Performance in Detail

Goldman's net revenue declined 8% year over year to $9.3 billion in the quarter under review. Revenues were mainly impeded by lower institutional client services revenues along with reduced investing and lending revenues. However, revenues outpaced the Zacks Consensus Estimate of $8.9 billion.

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

Investment Banking division generated revenues of $1.8 billion, up 13% year over year. Results reflected higher-than-expected financial advisory revenues. Moreover, revenues from the underwriting business (up 1% year over year) were on the upswing, driven by elevated revenues in equity underwriting, partially offset by lower revenues from debt underwriting.

Investment Management division generated revenues of $1.6 billion, up 20% year over year. Results reflected increased management and other fees along with higher transaction revenues and incentive fees.

However, Investing and Lending division booked revenues of $1.5 billion in the quarter, down 26% year over year. Results included net gains of $702 million from investments in equities, net interest income and net gains of $597 million from debt securities and loans coupled with other net revenues of $230 million.

Institutional Client Services division recorded revenues of $4.4 billion, down 13% year over year. Results were hindered by lower revenues in Fixed Income, Currency and Commodities Client Execution (FICC), marked by decreased net revenues primarily in mortgages, followed by currencies, credit products along with interest rate products.

A fall in equity trading revenues (down 17% year over year) was recorded, mainly due to lower net revenues in equities client execution. Notably, excluding net revenues associated with Americas reinsurance business, which was sold by Goldman in second-quarter 2013, net revenues in equities were down 6% year over year.

Operating expenses descended 6% to $6.3 billion compared with the prior-year quarter. Expenses decreased largely due to lower compensation and employee benefits expense and reduced non-compensation expenses.

Non-compensation expenses were $2.3 billion in the quarter, down 3% year over year, primarily due to decline in insurance reserves reflecting the sale of Americas reinsurance business and reduced other expenses.

Evaluation of Capital

Goldman exhibited a strong capital position in the reported quarter. As of Mar 31, 2014, the company's Tier 1 capital ratio was 16.3% and Common Equity Tier 1 ratio was 14.6%, reflecting the amended definition of regulatory capital and the transitional provisions which became effective Jan 1, 2014.

In first-quarter 2014, Goldman completed an adequate parallel run under the revised capital framework. Therefore, beginning with the second-quarter 2014, the company's capital ratios will be calculated under the Federal Reserve's Basel III Advanced approach. As of Mar 31, 2014, Common Equity Tier 1 ratio calculated under this approach was 11.3%.

Return on average common shareholders' equity, on an annualized basis, was 10.9% in the reported quarter compared with 12.7% in the prior quarter. Goldman's book value per share increased 1% to $154.69, while tangible book value per share rose 1% to $145.04, as compared with the end of 2013.

Capital Deployment Update

During first-quarter 2014, Goldman repurchased 10.3 million shares of its common stock at an average price per share of $166.58 and a total cost of $1.72 billion. Remaining share authorization under Goldman's existing repurchase program stands at 46.9 million shares.

In Conclusion

We expect Goldman to benefit from its well-managed global franchise, strong capital base and recent investments in the near future. Further, the company is gaining on cost-control measures and its stress test clearance with the 2014 capital plan approval exhibits financial strength. However, regulatory issues, including lawsuits and the lower top line remain concerns.

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. This banking major currently carries a Zacks Rank #3 (Hold).

Performances of Other Large Wall Street Firms

The first-quarter earnings season kick started with Wall Street biggies such as Wells Fargo & Company WFC and JPMorgan Chase & Co. JPM. Wells Fargo achieved the seventeenth consecutive quarter of earnings growth by reporting earnings of $1.05 per share. Results improved from $1.00 earned in the prior quarter and 92 cents in the year-ago quarter. Also, the results beat the Zacks Consensus Estimate by 8 cents.

However, JPMorgan failed to override the tough backdrop that banks have been enduring since the year started and delivered a negative earnings surprise of 9.2%. The banking giant came out with earnings of $1.28 per share, missing the Zacks Consensus Estimate of $1.41 by a wide margin. This is also a massive deterioration from the year-ago number of $1.59.

Among others, Bank of America Corporation BAC lost its earnings momentum to a tough industry backdrop and reported a loss of 5 cents in the first quarter. This was a significant miss from the Zacks Consensus Estimate of earnings of 5 cents and also compares unfavorably with 10 cents earned in the prior-year quarter.

Litigation expense and related legal reserves previously announced by the company were primarily responsible for such a disappointing outcome. Moreover, lack of top-line improvement, higher provision and an unfavorable expense trend pressured the bottom line.