Goldman Sachs Q2 Earnings Impress Investors on Higher Revs

Driven by strong top-line performance, The Goldman Sachs Group, Inc.'s GS second-quarter 2014 earnings per share came in at $4.10, significantly outpacing the Zacks Consensus Estimate of $3.07. Moreover, results were above the year-ago figure of $3.70.

Shares of Goldman increased around 2% in the pre-market session, indicating that investors were 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.

Higher investment banking revenues and steady capital deployment activities were the positives for the quarter. However, increased expenses exhibited undisciplined expense management. Moreover, lower trading revenues reflected an unstable economic environment and market volatility.

Net income applicable to common shareholders in the quarter was $1.95 billion, increasing 5% from $1.86 billion recorded in the prior-year quarter.

Performance in Detail

Goldman's net revenue climbed 6% year over year to $9.1 billion in the quarter under review. Revenues were mainly driven by elevated investing and lending revenues, partially offset by lower institutional client services revenues. Moreover, revenues outpaced the Zacks Consensus Estimate of $7.9 billion.

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

Investment Banking division generated revenues of $1.8 billion, up 15% year over year. Results reflected higher-than-expected financial advisory revenues. Moreover, revenues from the underwriting business (up 20% year over year) were on the upswing, driven by elevated revenues in equity underwriting as well as debt underwriting.

Investment Management division generated revenues of $1.4 billion, up 8% year over year. Results reflected increased management and other fees along with higher incentive fees, partially offset by reduced transaction revenues.

Investing and Lending division booked revenues of $2.1 billion in the quarter, up 46% year over year. Results included net gains of $1.25 billion from investments in equities, net interest income and net gains of $604 million from debt securities and loans coupled with other net revenues of $215 million.

However, Institutional Client Services division recorded revenues of $3.8 billion, down 11% 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 currencies followed by commodities and credit products.

A fall in equity trading revenues (down 13% 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 9% year over year.

Operating expenses ascended 6% to $6.3 billion compared with the prior-year quarter. Expenses increased largely due to higher compensation and employee benefits (up 6% year over year) as well as non-compensation expenses.

Non-compensation expenses were $2.4 billion in the quarter, up 5% year over year, primarily due to elevated other expenses reflecting higher net provisions for litigation and regulatory proceedings. Decline in insurance reserves depicting the sale of Americas reinsurance business was on the positive side.

Evaluation of Capital

Goldman exhibited a strong capital position in the reported quarter. As of Jun 30, 2014, the company's Tier 1 ratio was 11.4% and Common Equity Tier 1 ratio was 11.3% under the Basel III Advanced approach, reflecting the valid transitional provisions.

Return on average common shareholders' equity, on an annualized basis, was 10.9% in the reported quarter, in line with the prior quarter. Goldman's book value per share increased 2% to $158.21, while tangible book value per share rose 2% to $148.45, as compared with the prior quarter.

Capital Deployment Update

During second-quarter 2014, Goldman repurchased 7.8 million shares of its common stock at an average price per share of $160.89 and a total cost of $1.25 billion. Remaining share authorization under Goldman's existing repurchase program stands at 39.1 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. Moreover, sustainable top-line growth would act as a driving factor. However, regulatory issues, including lawsuits and mounting expenses despite cost control measures remain a concern.

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).

The second-quarter earnings season kick started with Wall Street biggie – Wells Fargo & Co. WFC. Driven by prudent expense management, Wells Fargo earned $1.01 per share in second-quarter 2014, thereby surpassing 98 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate.

Among other top Wall Street firms, Bank of America Corp. BAC will report on Jul 16, while Morgan Stanley MS on Jul 17.