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Goldman (GS) Q1 Earnings Disappoint on Rise in Expenses

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Impacted by higher expenses, The Goldman Sachs Group, Inc.’s (GS - Free Report) first-quarter 2017 results recorded a negative earnings surprise of 4.3%. The company reported earnings per share of $5.15, missing the Zacks Consensus Estimate of $5.38. Further, the bottom line witnessed significant deterioration on a year-over-year basis.

Results were primarily affected by higher expenses and lower equities revenues. However, higher underwriting fees were a tailwind. Notably, the quarter witnessed political uncertainty, reduced levels of volatility and low client activity levels.

Net earnings of $2.26 billion reflected a 15.7% decline from the prior-year quarter.
 

Solid Investment Banking Revenues & Low Expenses

Goldman’s net revenue climbed 27% year over year to $8.0 billion in the quarter under review. However, revenues lagged the Zacks Consensus Estimate of $8.4 billion.

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

The Institutional Client Services division recorded revenues of $3.4 billion, down 2% year over year. The fall reflected lower net revenues in commissions and fees, along with securities services, which resulted in the decline in Equities revenues (down 6%).

However, rise in Fixed Income, Currency and Commodities Client Execution revenues (up 1% year over year), driven by higher revenues from interest rate products and mortgage products, was mostly offset by reduced  revenues  in  commodities,  and  currencies  and  credit  products.

The Investment Banking division generated revenues of $1.7 billion, up 16% year over year. Results displayed higher debt and equity underwriting revenues, indicating 37% year-over-year jump in total underwriting fees. However, lower financial advisory revenues (down 2%) were recorded, affected by the decreased number of completed industry-wide transactions during the quarter.

The Investment Management division recorded revenues of $1.5 billion, up 12% year over year. The growth was mainly driven by higher incentive and transaction fees, along with management and other fees.

The Investing and Lending division’s revenues of $1.5 billion in the quarter were significantly higher on a year-over-year basis. The rise was aided by surge in revenues from investments in equities, as well as higher revenues in debt securities and loans.

Total operating expenses climbed 15% year over year to $5.5 billion. Expenses rose mainly due to increase in compensation and employee benefits expenses (up 24%). Non-compensation expenses were also up 5% due to elevated other expenses, resulting from increased provisions for litigation and regulatory proceedings.

Strong Capital Position

Goldman exhibited a robust capital position in the reported quarter. As of Mar 31, 2017, the company’s Common Equity Tier 1 ratio was 12.9% under the Basel III Advanced Approach, highlighting the valid transitional provisions. The figure was down from 13.1% recorded in the prior quarter. The company’s supplementary leverage ratio on a fully phased-in basis was 6.4% at the end of the first quarter, in line with the prior quarter.

Adjusted return on average common shareholders’ equity, on an annualized basis, was 11.4% in the reported quarter.

Capital Deployment Update

During first-quarter 2017, the company repurchased 6.2 million shares of its common stock at an average price per share of $243.22 and a total cost of $1.50 billion.

Concurrent with the earnings release, the Board of Directors of Goldman announced 15.4% hike in the company’s quarterly common stock dividend to 75 cents per share. The new dividend will be paid on Jun 29 to common shareholders of record as of Jun 1, 2017.  

Conclusion

Results of Goldman indicate a disappointing quarter. Costs stemming from unresolved litigations and stringent financial reforms remain near- to medium-term headwinds. However, the company’s well-diversified business, apart from its solid investment banking operations, continues to ensure earnings stability. Its focus to capitalize on new growth opportunities through several strategic investments, including the digital consumer lending platform, should bolster overall business growth.
 

Currently, Goldman carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of other Major Banks

Citigroup Inc. (C - Free Report) delivered a positive earnings surprise of 8.9% in first-quarter 2017, riding on higher revenues. The company’s earnings per share of $1.35 for the quarter outpaced the Zacks Consensus Estimate of $1.24. Also, earnings compared favorably with the year-ago figure of $1.10 per share. Notably, results reflect one-time adjustments of 1 cent.

Driven by net interest income, Wells Fargo & Company’s (WFC - Free Report) first-quarter 2017 earnings recorded a positive surprise of about 3.1%. Earnings of $1.00 per share outpaced the Zacks Consensus Estimate by 3 cents. Moreover, the figure compared favorably with the prior-year quarter’s earnings of 99 cents per share.

M&T Bank Corporation (MTB - Free Report) recorded a positive earnings surprise of 10.8% in first-quarter 2017. The company reported net operating earnings of $2.15 per share which surpassed the Zacks Consensus Estimate of $1.94. Also, the bottom line improved 15% year over year.

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