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Goldman (GS) Q4 Earnings Impressive, Tax Expense Recorded

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Despite weak fixed income trading revenues, The Goldman Sachs Group, Inc.’s (GS - Free Report) fourth-quarter 2017 results recorded a positive earnings surprise of 15.9%. The company reported adjusted earnings per share of $5.68, comfortably beating the Zacks Consensus Estimate of $4.90. Further, the bottom line witnessed 11.8% year-over-year improvement.

Notably, results, including income tax expense related to the tax reform of $4.4 billion, reported net loss of $1.93 billion or $5.51 per share.

Though the investment bank remains under pressure due to lackluster fixed-income trading activities on low volatility during the fourth quarter, a continued momentum in investment banking business supported the bottom-line numbers. Further, higher underwriting revenues was recorded.

Elevated expenses were an undermining factor. Notably, the quarter witnessed challenging market-making environment, reduced levels of volatility and low client activity levels.

For full-year 2017, adjusted net income per share of $19.76 came in higher than the year-ago earnings of $16.29. Earnings also surpassed the Zacks Consensus Estimate of $18.98.

Revenues Fall Y/Y, Expenses Escalate

For full-year 2017, the company’s reported revenues of $32.1 billion were up 5% year over year. Moreover, revenues managed to beat the Zacks Consensus Estimate of $31.8 billion.

Goldman’s net revenues were down 4% year over year to $7.8 billion in the quarter under review. However, the figure handily outpaced 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 $2.4 billion, down 34% year over year. The fall indicates lower net revenues in Fixed Income, Currency and Commodities Client Execution revenues (down 50% year over year), adversely affected by lower revenues from interest rate products, commodities, mortgage products, currencies and credit products.

Fall in equities client execution, partially offset by rise in securities service revenues, resulted in the downside in Equities revenues (down 14%).

The Investment Banking division generated revenues of $2.1 billion, up 44% year over year. Results highlight higher underwriting revenues (up 76%), aided by elevated debt and equity underwriting revenues. In addition, higher financial advisory revenues (up 9%) were recorded.

The Investment Management division recorded revenues of $1.7 billion, up 4% year over year. The growth was mainly driven by higher management and other fees, along with transaction fees, partially offset by lower incentive fees.

The Investing and Lending division’s revenues of $1.7 billion in the quarter were 12% higher on a year-over-year basis. The upside stemmed from the surge in revenues from investments in equities.

Total operating expenses flared up 1% year over year to $4.7 billion. Expenses moved up mainly due to rise in non-compensation expenses (up 10%), partly offset by decline in compensation and employee-benefit expenses (down 12%).

Expenses included rise in almost all components, partially offset by lower other costs.

Strong Capital Position

Goldman displayed a robust capital position in the reported quarter. As of Dec 31, 2017, the company’s Common Equity Tier 1 ratio was 10.9% under the Basel III Advanced Approach, highlighting the valid transitional provisions. The figure was down from 13.1% recorded in the prior-year quarter. Notably, the ratio was impacted by 70 basis points (bps) due to the tax legislation.

The company’s supplementary leverage ratio, on a fully phased-in basis, was 5.8% at the end of the reported quarter, down from 6.4% recorded in the previous quarter. Notably, the ratio was impacted by 30 bps due to the tax legislation.

Adjusted return on average common shareholders’ equity, on an annualized basis, was 10.8% as of Dec 31, 2017.

Capital Deployment Update

During 2017, Goldman repurchased 29 million shares of its common stock at an average price per share of $231.87 and a total cost of $6.72 billion. Notably, during fourth-quarter 2017, the company repurchased 6.6 million shares of its common stock at an average price per share of $241.13 and a total cost of $1.59 billion.

Conclusion

Results of Goldman highlight an impressive quarter. Though trading activities and tax expense related to the recent tax reform weighed on the results, robust investment banking results and underwriting business were positive factors.

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, will likely bolster overall business growth. However, costs stemming from brokerage and market development remain near- to medium-term headwinds.
 

 

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

Wells Fargo’s (WFC - Free Report) fourth-quarter 2017 adjusted earnings of 97 cents per share improved from the prior-year quarter earnings of 96 cents. The Zacks Consensus Estimate came in at $1.04.

Including $3.35 billion after-tax benefit, or 67 cents, from the Tax Cuts & Jobs Act, $848 million pre-tax gain, or 11 cents from the sale of Wells Fargo Insurance Services and $3.25 billion pre-tax expense, or 59 cents related to litigation accruals, net income came in at $6.2 billion or $1.16 per share.

Amid an expected trading weakness, strong investment banking results and higher rates drove JPMorgan’s (JPM - Free Report) fourth-quarter 2017 earnings of $1.76 per share, which handily surpassed the Zacks Consensus Estimate of $1.69. Results exclude one-time tax related charge of $2.4 billion or 69 cents per share.

Solid loan growth (driven mainly by improved credit card loans) and higher interest rates supported net interest income growth. Further, rise in investment banking fees and stable equity trading income supported the top line.

Riding on higher revenues, PNC Financial (PNC - Free Report) reported a positive earnings surprise of 4.1% in fourth-quarter 2017. Adjusted earnings per share of $2.29 beat the Zacks Consensus Estimate of $2.20. Moreover, the bottom line reflected a 16.2% increase from the prior-year quarter.

Continued easing of pressure on net interest margin supported the company’s higher net interest income during the quarter. Also, non-interest income witnessed year-over-year growth. However, higher expenses hurt results to some extent. Further, deterioration in credit quality was a headwind.

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