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The Goldman Sachs Group, Inc.’s (GS - Analyst Report) third-quarter 2013 earnings per share came in at $2.88, significantly surpassing the Zacks Consensus Estimate of $2.48. Moreover, the reported earnings outpaced the year-ago figure of $2.85 per share.
Amid challenging global markets, better-than-expected results were driven by Goldman’s prudent expense management. Moreover, the company’s strong capital position was a positive. However, a fall in the top line was a major concern.
Net income applicable to common shareholders in the quarter was $1.43 billion, declining slightly from $1.46 billion recorded in the prior-year quarter.
Performance in Detail
Goldman’s net revenue declined 20% year over year to $6.7 billion in the quarter under review. Revenues were mainly negatively impacted by lower institutional client services revenue and reduced investing and lending revenues. Revenues also lagged the Zacks Consensus Estimate of $7.6 billion.
Quarterly revenues, as per business segments, are as follows:
Investment Banking division generated revenues of $1.17 billion, almost in line with the prior-year quarter. Results reflected lower-than-expected financial advisory revenues. However, revenues from the underwriting business (up 13% year over year) were on the upswing, driven by elevated revenues in equity underwriting.
Institutional Client Services division recorded revenues of $2.86 billion, down 32% year over year. Results were impacted by lower revenues in Fixed Income, Currency and Commodities Client Execution (FICC), marked by decreased net revenues in currencies, credit products along with mortgages and interest rate products.
A fall in equity trading revenues (down 18% year over year) was recorded, due to lower net revenues in equities client execution and securities services. Though global equity prices rose during the reported quarter, equities operated in an environment where lower levels of activity and volatility was recorded.
Investing and Lending division booked revenues of $1.48 billion in the quarter, down 18% from $1.80 billion in the prior-year quarter. Results included net gains of $938 million from investments in equities, net interest income and net gains of $300 million from debt securities and loans coupled with other net revenues of $237 million.
However, Investment Management division generated revenues of $1.22 billion, up 2% year over year. Results reflected increased management and other fees, partially offset by reduced transaction revenues.
Operating expenses descended 25% to $4.6 billion compared with the prior-year quarter. Expenses decreased largely due to reduced compensation and employee benefits expense.
Non-compensation expenses were $2.2 billion in the quarter, down 9% year over year. Additionally, results included net provisions of $142 million for litigation and regulatory proceedings.
Evaluation of Capital
Goldman exhibited a strong capital position in the reported quarter. As of Sep 30, 2013, Goldman’s Tier 1 capital ratio and Tier 1 common ratio under Basel I was 16.3% and 14.2% compared with 15.6% and 13.5%, respectively, in the prior quarter, reflecting revised market risk regulatory capital requirements, which became effective on Jan 1, 2013.
Return on average common shareholders’ equity, on an annualized basis, was 8.1% in the reported quarter as compared with 10.5% in the prior quarter. Goldman’s book value per share and tangible book value per share surged to $153.58 and $143.86, from $151.21 and $141.62 respectively, at the end of the prior quarter.
Assets under supervision increased to $991 billion in the quarter compared with $951 billion in the prior-year quarter and recorded net market appreciation of $19 billion and net inflows of $17 billion.
Capital Deployment Update
During third-quarter 2013, Goldman repurchased 10.2 million shares of its common stock at an average price per share of $161.59 and a total cost of $1.65 billion. Remaining share authorization under Goldman’s existing repurchase program stands at 65.7 million shares.
Notably, on Oct 1, 2013, Warren Buffett’s Berkshire Hathaway Inc. (BRK.A - Snapshot Report) : (BRK.B - Analyst Report) exercised its revised warrant agreement with Goldman for a net share settlement. Specifically, Berkshire Hathaway received 13.1 million shares worth $2.15 billion and became the sixth largest external investor in Goldman with 2.91% stake.
Concurrent with the earnings release, Goldman declared its increased quarterly dividend of 55 cents per share. The revised dividend reflects a 10% hike from the prior dividend of 50 cents. The new dividend will be paid on Dec 30, 2013 to common shareholders of record as of Dec 2, 2013.
We expect Goldman to benefit from its well-managed global franchise, strong capital base, and recent investments in the near future. However, regulatory issues, including lawsuits and the market volatility remain concerns.
The positive developments of the sector and gradually improving macroeconomic elements helped the banking behemoth maintain its illustrious track record.
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. Goldman currently carries a Zacks Rank #3 (Hold).
Among other Wall Street big shots, Wells Fargo & Company (WFC - Analyst Report) achieved the 15th consecutive quarter of growth in earnings per share by reporting earnings of 99 cents per share in third-quarter 2013. Results improved from 98 cents earned in the prior quarter and 88 cents in the year-ago quarter. Also, results beat the Zacks Consensus Estimate by 2 cents.
Total loans and deposits grew amid economic challenges and disciplined expense management. Moreover, a strong capital position and returns on assets and equity acted as the positives. Wells Fargo also reported $900 million in reserve release (pre-tax), attributable to an improved credit performance. However, the company experienced a fall in top line due to reduced non-interest income.
Further, we look forward to the results of Morgan Stanley (MS - Analyst Report), which will report on Oct 18.