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Goldman's 1Q Earnings Outperform

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The Goldman Sachs Group, Inc. (GS - Free Report) reported its first-quarter 2013 earnings per share of $4.29, significantly surpassing the Zacks Consensus Estimate of $3.85. Moreover, the reported earnings outpaced the prior-year quarter’s earnings of $3.92 per share.

Amid challenging global markets, better-than-expected results were driven by Goldman’s record revenues with an elevation in client activity. Moreover, decreased operating expenses reflect prudent expense management.

Net income applicable to common shareholders in the quarter was $2.2 billion, up from $2.1 billion recorded in the prior-year quarter.

Performance in Detail

Goldman’s net revenue surged 9% sequentially and 1% year over year to $10.1 billion in the quarter under review. Revenues were positively impacted by a rise in global equity prices, lower volatility levels and improved client activity levels. Revenues also comfortably surpassed the Zacks Consensus Estimate of $9.3 billion.

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

Investment Banking division generated revenues of $1.6 billion, up 36% year over year. Results reflected higher-than-expected revenues from underwriting business (up 63% year over year). Elevated revenues in equity and debt underwriting reflected an augmentation in client activity.

Investing and Lending division booked revenues of $2.1 billion in the quarter, up 8% year over year. Results principally reflected a gain of $24 million from Goldman’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), coupled with net gains of $1.1 billion from other investments in equity securities.

Moreover, the segment recorded net interest income and net gains of $566 million from debt securities and loans and other net revenues of $375 million.

Investment Management division generated revenues of $1.3 billion, up 12% year over year. The year-over-year rise mainly reflected increased management and other fees and higher incentive fees.

However, Institutional Client Services division recorded revenues of $5.1 billion, dipping 10% year over year. Results were impacted by lower revenues in Fixed Income, Currency and Commodities Client Execution (FICC), marked by decreased net revenues in interest rate products.

Moreover, a fall in equity trading revenues (down 15% year over year) was recorded, due to lower net revenues in equities client execution and reduced commissions and fees, reflecting lower market volumes.

In the first quarter of 2013, operating expenses descended 1% to $6.7 billion compared with the prior-year quarter. Non-compensation expenses were $2.4 billion in the quarter, down 1% year over year. Expenses decreased largely due to lower insurance reserves and reduced depreciation and amortization.

These positives were partially offset by higher other expenses and elevated market development costs. Additionally, results included net provisions of $110 million for regulatory proceedings.

Evaluation of Capital

Though the company received the Federal Reserve’s approval for its proposed capital plan, Goldman has to resubmit the plan by the end of third quarter 2013. The bank has been asked to resubmit its capital plans considering the weaknesses recognized in their capital planning processes.

Yet, Goldman exhibited a strong capital position in the reported quarter. As of Mar 31, 2013, Goldman’s Tier 1 capital ratio and Tier 1 common ratio under Basel I was 14.4% and 12.7% compared with 16.7% and 14.5%, respectively, in the prior quarter, reflecting revised market risk regulatory capital requirements, which became effective on Jan 1, 2013.

Return on average common shareholder equity, on an annualized basis, was 12.4% in the reported quarter. Goldman’s book value per share and tangible book value per share surged to $148.41 and $138.62, from $144.67 and $134.06 respectively, at the end of the prior quarter.

Assets under management (AUM) increased to $860 billion in the quarter compared with $854 billion in the prior quarter, reflecting net market appreciation of $10 billion, partially offset by net outflows of $4 billion.

Capital Deployment Update

During first-quarter 2013, Goldman repurchased 10.1 million shares of its common stock at an average price per share of $150.53 and a total cost of $1.52 billion. Notably, on Apr 15, 2013, the Board of Directors at Goldman authorized the buy back of an additional 75.0 million shares of common stock pursuant to the company’s existing share repurchase program.

Remaining share authorization under Goldman’s existing repurchase program, including new authorization stands at 86.4 million shares.

Concurrent with the earnings release, Goldman declared its quarterly dividend of 50 cents per share. The dividend will be paid on Jun 27, 2013 to common shareholders of record as of May 30, 2013.

Other Developments in the Quarter

On Mar 25, 2013, Goldman revised its warrant agreement with Berkshire Hathaway for a net share settlement and to set the exercise date as of Oct 1, 2013.

As per the amended agreement, Goldman will deliver to Berkshire Hathaway the number of shares of common stock, which would be equal in value to the difference between the average closing price of Goldman’s common stock over the 10 trading days prior to Oct 1, 2013 and the exercise price of $115 multiplied by 43.5 million shares covered under the warrant.

Our Viewpoint

Overall, Goldman’s results improved significantly compared to the prior-year period, mainly driven by top-line growth. Moreover, decreased operating expenses remain a positive catalyst. Yet, regulatory issues, including lawsuits and the fundamental pressures on the banking sector, are expected to dent the financials of the company in the upcoming quarters.

We expect Goldman to benefit from its well-managed global franchise, strong capital base, and recent investments in the near future.

In Conclusion

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, one can consider Goldman to be a value investment due to its steady dividend-yielding nature. Goldman currently retains a Zacks Rank #3 (Hold).

Among other Wall Street big shots, Wells Fargo & Company (WFC - Free Report) achieved the 13th consecutive quarter of growth in earnings per share by reporting earnings of 92 cents per share in first quarter 2013. Results improved from earnings per share of 91 cents in the prior quarter and 75 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by a nickel.

Results at Wells Fargo reflected growth in total loans and deposits amid a challenging economy and prudent expense management. Moreover, a strong capital position and returns on assets and equity acted as positives. It also reported $200 million in reserve release (pre-tax), attributable to improved portfolio performance. However, the company experienced a fall in top line.

Further, we look forward to the results of Bank of America Corporation (BAC - Free Report) on Apr 17, while Morgan Stanley (MS - Free Report) will report on Apr 18.

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