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The Goldman Sachs Group, Inc.’s (GS - Free Report) second-quarter 2016 results recorded a positive earnings surprise of 23.6% driven by effective cost control. The company reported earnings per share of $3.72, outpacing the Zacks Consensus Estimate of $3.01. Moreover, the bottom line compared favorably with the year-ago figure of $1.98.
Shares were in the red in opening trade, displaying the lack of encouragement among investors following the release. The price reaction during the later part of the trading session will give a fair idea about whether Goldman was able to meet expectations.
Effective cost-control measures and fixed income revenues were primary contributors in this quarter. However, a reduced number of completed mergers and acquisitions along with a decline in equity trading revenues acted as headwinds.
Deteriorating Revenues & Continued Cost Reduction
Goldman’s net revenue slumped 13% year over year to $7.9 billion in the quarter under review. Results were mainly affected by lower non-interest income. However, revenues exceeded the Zacks Consensus Estimate of $7.6 billion.
Quarterly revenues, as per business segments, are as follows:
The Institutional Client Services division recorded revenues of $3.7 billion, up 2% year over year. Results were driven by better-than-expected revenues in Fixed Income, Currency and Commodities Client Execution (up 20% year over year), marked by increased revenues in currencies and credit products along with interest rate products and commodities, partially offset by considerably reduced net revenues in mortgages.
Though market-making conditions improved from the first quarter, the economic environment still remains challenging in the quarter as low interest rates, political uncertainty and global growth concerns continue.
However, a decline in equity trading revenues (down 12% year over year) was recorded, mainly due to lower net revenues in equities client execution.
The Investment Banking division generated revenues of $1.8 billion, down 11% year over year. Results reflected lower-than-expected financial advisory revenues, impacted by the decreased number of completed mergers and acquisitions during the quarter. Moreover, revenues from the underwriting business (down 17% year over year) declined, hurt by lower revenues in equity underwriting, partially offset by elevated debt underwriting.
The Investment Management division recorded revenues of $1.4 billion, down 18% year over year. Lower transaction, management and incentive revenues affected the results.
The Investing and Lending division booked revenues of $1.1 billion in the quarter, down 38% year over year. Results displayed decreased revenues from equity investments and from debt securities and loans.
Operating expenses decreased 26% to $5.5 billion from the prior-year quarter. Expenses declined largely due to lower compensation and employee benefits expenses (down 13%) and non-compensation expenses (down 40%).
Non-compensation expenses were $2.1 billion in the quarter, down 40% year over year, primarily due to lower other expenses exhibiting reduced net provisions for litigation and regulatory proceedings.
Strong Capital Position
Goldman exhibited a strong capital position in the reported quarter. As of Jun 30, 2016, the company’s Common Equity Tier 1 ratio was 12.2% under the Basel III Advanced Approach, reflecting the valid transitional provisions. This is in line with the prior quarter.
Adjusted return on average common shareholders’ equity, on an annualized basis, was 8.7% in the reported quarter. Goldman’s book value per share of $176.62 and tangible book value per share of $166.90 reflected a 2% increase from the end of first-quarter 2016.
Capital Deployment Update
During second-quarter 2016, the company repurchased 11.1 million shares of its common stock at an average price per share of $156.60 and at a total cost of $1.74 billion.
Conclusion
Goldman reported an encouraging quarter. Cost-control measures with reduced legal provisions and high fixed income revenues drove the results for the company. Though there are concerns related to legal issues and the company’s global exposure, equity-centric activities in the U.S. should support results in the upcoming quarters with recovery expected in the capital markets. However, a challenging environment and volatile markets kept investors off the market, which led to reduction in revenues.
This banking major currently carries a Zacks Rank #3 (Hold).
Performance of Other Major Banks
Banking major – JPMorgan Chase & Co. (JPM - Free Report) – which kicked started the second-quarter 2016 earnings, driven by improved trading revenues, reported earnings of $1.55 per share neatly outpacing the Zacks Consensus Estimate of $1.43. Also, the figure reflects a 1% rise from the year-ago period. Notably, the results included a legal benefit of $430 million.
Impacted by higher expenses, Wells Fargo & Company’s (WFC - Free Report) second-quarter 2016 earnings recorded a negative surprise of about 1%. Earnings of $1.01 per share missed the Zacks Consensus Estimate by a penny. Moreover, it compared unfavorably with the prior-year quarter’s earnings of $1.03 per share.
Driven by decline in operating expenses, Citigroup Inc. (C - Free Report) delivered a positive earnings surprise of nearly 15% in second-quarter 2016. The company’s earnings from continuing operations per share of $1.25 for the quarter outpaced the Zacks Consensus Estimate of $1.09. However, earnings compared unfavorably with the year-ago figure of $1.51 per share.
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Prudent Cost Management Drives Goldman (GS) Q2 Earnings
The Goldman Sachs Group, Inc.’s (GS - Free Report) second-quarter 2016 results recorded a positive earnings surprise of 23.6% driven by effective cost control. The company reported earnings per share of $3.72, outpacing the Zacks Consensus Estimate of $3.01. Moreover, the bottom line compared favorably with the year-ago figure of $1.98.
Shares were in the red in opening trade, displaying the lack of encouragement among investors following the release. The price reaction during the later part of the trading session will give a fair idea about whether Goldman was able to meet expectations.
Effective cost-control measures and fixed income revenues were primary contributors in this quarter. However, a reduced number of completed mergers and acquisitions along with a decline in equity trading revenues acted as headwinds.
Deteriorating Revenues & Continued Cost Reduction
Goldman’s net revenue slumped 13% year over year to $7.9 billion in the quarter under review. Results were mainly affected by lower non-interest income. However, revenues exceeded the Zacks Consensus Estimate of $7.6 billion.
Quarterly revenues, as per business segments, are as follows:
The Institutional Client Services division recorded revenues of $3.7 billion, up 2% year over year. Results were driven by better-than-expected revenues in Fixed Income, Currency and Commodities Client Execution (up 20% year over year), marked by increased revenues in currencies and credit products along with interest rate products and commodities, partially offset by considerably reduced net revenues in mortgages.
Though market-making conditions improved from the first quarter, the economic environment still remains challenging in the quarter as low interest rates, political uncertainty and global growth concerns continue.
However, a decline in equity trading revenues (down 12% year over year) was recorded, mainly due to lower net revenues in equities client execution.
The Investment Banking division generated revenues of $1.8 billion, down 11% year over year. Results reflected lower-than-expected financial advisory revenues, impacted by the decreased number of completed mergers and acquisitions during the quarter. Moreover, revenues from the underwriting business (down 17% year over year) declined, hurt by lower revenues in equity underwriting, partially offset by elevated debt underwriting.
The Investment Management division recorded revenues of $1.4 billion, down 18% year over year. Lower transaction, management and incentive revenues affected the results.
The Investing and Lending division booked revenues of $1.1 billion in the quarter, down 38% year over year. Results displayed decreased revenues from equity investments and from debt securities and loans.
Operating expenses decreased 26% to $5.5 billion from the prior-year quarter. Expenses declined largely due to lower compensation and employee benefits expenses (down 13%) and non-compensation expenses (down 40%).
Non-compensation expenses were $2.1 billion in the quarter, down 40% year over year, primarily due to lower other expenses exhibiting reduced net provisions for litigation and regulatory proceedings.
Strong Capital Position
Goldman exhibited a strong capital position in the reported quarter. As of Jun 30, 2016, the company’s Common Equity Tier 1 ratio was 12.2% under the Basel III Advanced Approach, reflecting the valid transitional provisions. This is in line with the prior quarter.
Adjusted return on average common shareholders’ equity, on an annualized basis, was 8.7% in the reported quarter. Goldman’s book value per share of $176.62 and tangible book value per share of $166.90 reflected a 2% increase from the end of first-quarter 2016.
Capital Deployment Update
During second-quarter 2016, the company repurchased 11.1 million shares of its common stock at an average price per share of $156.60 and at a total cost of $1.74 billion.
Conclusion
Goldman reported an encouraging quarter. Cost-control measures with reduced legal provisions and high fixed income revenues drove the results for the company. Though there are concerns related to legal issues and the company’s global exposure, equity-centric activities in the U.S. should support results in the upcoming quarters with recovery expected in the capital markets. However, a challenging environment and volatile markets kept investors off the market, which led to reduction in revenues.
GOLDMAN SACHS Price, Consensus and EPS Surprise
GOLDMAN SACHS Price, Consensus and EPS Surprise | GOLDMAN SACHS Quote
This banking major currently carries a Zacks Rank #3 (Hold).
Performance of Other Major Banks
Banking major – JPMorgan Chase & Co. (JPM - Free Report) – which kicked started the second-quarter 2016 earnings, driven by improved trading revenues, reported earnings of $1.55 per share neatly outpacing the Zacks Consensus Estimate of $1.43. Also, the figure reflects a 1% rise from the year-ago period. Notably, the results included a legal benefit of $430 million.
Impacted by higher expenses, Wells Fargo & Company’s (WFC - Free Report) second-quarter 2016 earnings recorded a negative surprise of about 1%. Earnings of $1.01 per share missed the Zacks Consensus Estimate by a penny. Moreover, it compared unfavorably with the prior-year quarter’s earnings of $1.03 per share.
Driven by decline in operating expenses, Citigroup Inc. (C - Free Report) delivered a positive earnings surprise of nearly 15% in second-quarter 2016. The company’s earnings from continuing operations per share of $1.25 for the quarter outpaced the Zacks Consensus Estimate of $1.09. However, earnings compared unfavorably with the year-ago figure of $1.51 per share.
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