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Goldman Sachs (GS) Q2 Earnings Impress on Record Revenues

Reflecting the highest strong second-quarter net revenues in nine years, Goldman Sachs’ GS second-quarter 2018 results recorded a positive earnings surprise of 28.1%. The company reported earnings per share of $5.98, comfortably beating the Zacks Consensus Estimate of $4.67. Further, the bottom line witnessed 51.4% year-over-year improvement.

The investment bank turned triumphant with strong Fixed Income, Currency and Commodities (FICC) Client Execution revenues, and a continued momentum in investment banking business, supporting the bottom-line numbers. In addition, investing & lending activities, along with Investment Management business, were strong. However, elevated expenses were an undermining factor.

Notably, the quarter witnessed improved market-making environment and increased client activity levels.

Net earnings applicable to common shareholders came in at $2.3 billion, up 44% year over year.

Revenues Improve, Expenses Escalate

Goldman’s net revenues were up 19% year over year to $9.4 billion in the quarter under review. Moreover, the revenue figure handily outpaced the Zacks Consensus Estimate of $8.7 billion.

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

The Institutional Client Services division recorded revenues of $3.6 billion, up 17% year over year. The rise indicates elevated net revenues in Fixed Income, Currency and Commodities Client Execution revenues (up 45% year over year), driven by improvement in all major businesses, including considerably higher revenues from commodities, interest rate and credit products.

Increase in equities client execution was offset by lower securities service revenues, and flat commissions and fees, resulting in stable Equities revenues.

The Investment Banking division generated revenues of $2 billion, up 18% year over year. Results highlight higher underwriting revenues (up 27%), aided by elevated debt and equity underwriting revenues. Notably, net revenues from initial public offerings escalated. Moreover, increased financial advisory revenues (up 7%) stemming from rise in industry-wide completed mergers and acquisition transactions were recorded.

The Investment Management division recorded revenues of $1.8 billion, up 20% year over year. The uptick was mainly driven by higher management and other fees, along with elevated transaction and significant incentive fees.

The Investing and Lending division’s revenues of $1.9 billion in the quarter came in 23% higher on a year-over-year basis. The upside stemmed from the surge in revenues from investments in equities and debt securities & loans.

Total operating expenses flared up 14% year over year to $6.1 billion. Expenses moved up mainly due to rise in compensation and employee-benefit expenses (up 7%), and non-compensation expenses (up 24%).

Notably, higher net provisions for litigation and regulatory proceedings, and market development expenses were recorded.

Strong Capital Position

Goldman displayed a robust capital position in the reported quarter. As of Jun 30, 2018, the company’s Common Equity Tier 1 ratio was 11.5% under the Basel III Advanced Approach, highlighting the valid transitional provisions. The figure was up from 11.1% recorded in the prior quarter.

The company’s supplementary leverage ratio, on a fully phased-in basis, was 5.8% at the end of the April-June quarter, up from 5.7% witnessed in the previous quarter.

Return on average tangible common shareholders’ equity, on an annualized basis, was 13.5% as of Jun 30, 2018.

Conclusion

Results of Goldman highlight an impressive quarter. Remarkable improvement in trading revenues, robust investment banking results and underwriting business drove revenues. 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 resulting from brokerage and market development remain near- to medium-term headwinds.
 

The Goldman Sachs Group, Inc. Price, Consensus and EPS Surprise

The Goldman Sachs Group, Inc. Price, Consensus and EPS Surprise | The Goldman Sachs Group, Inc. Quote

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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 Banks

Driven by top-line strength, Citigroup C delivered a positive earnings surprise of 5.2% in the second quarter. Earnings from continuing operations per share of $1.62 for the quarter easily outpaced the Zacks Consensus Estimate of $1.54. Also, earnings were up 28% year over year.

Overall high revenues were reflected, driven by elevated banking, equity markets and consumer banking revenues, along with loan growth. Moreover, expenses remained stable. However, fixed income market revenues disappointed.

Wells Fargo WFC recorded a negative earnings surprise of 3.6% in second-quarter 2018. Adjusted earnings of $1.08 per share missed the Zacks Consensus Estimate of $1.12. Results came in line with the prior-year quarter earnings.

Notably, results exclude net discrete income tax expense of 10 cents per share. Including non-recurring items, net income came in at $5.2 billion or 98 cents per share compared with $5.9 billion or $1.08 per share in the prior-year quarter.

Among other Wall Street giants, U.S. Bancorp USB is scheduled to report second-quarter 2018 earnings on Jul 18.

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