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A month has gone by since the last earnings report for Goldman Sachs (GS). Shares have added about 6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Goldman due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Goldman Q1 Earnings Outshine Estimates, Revenues Jump
Given the strong capital markets performance, Goldman’s first-quarter 2021 earnings per share of $18.60 significantly surpassed the Zacks Consensus Estimate of $9.79. Also, the bottom line compares favorably with $3.11 per share earned in the year-earlier quarter.
The bank’s results were aided by higher FICC revenues. Also, the underwriting business displayed solid strength. In addition, wealth management and consumer banking business witnessed an upswing, reflecting rise in credit card loans.
Additionally, impressive financial advisory revenues, owing to the rise in industry-wide completed mergers and acquisitions transactions, acted as a tailwind. Moreover, provision benefit supported the results.
However, disappointing corporate lending revenues posed a headwind. Further, operating expenses increased during the quarter.
Net earnings of $6.84 billion increased substantially from $1.21 billion in the prior-year quarter.
Revenues Jump, Expenses Rise
Net revenues of $17.7 billion surged significantly from $8.74 billion in the year-ago quarter. The top line also beat the Zacks Consensus Estimate of $11.5 billion.
Total operating expenses increased 46% to $9.43 billion. Higher compensation and benefits, and transaction-based and technology expenses chiefly resulted in this rise.
Notably, net provisions for litigation and regulatory proceedings of $74 million were recorded compared with the prior-year quarter’s $184 million.
Provision for credit losses was a benefit of $70 million against provisions of $937 million in the prior-year quarter. Reserve reductions on wholesale and consumer loans were partially offset by portfolio growth, including provisions related to the proposed buyout of the General Motors co-branded credit card portfolio.
Solid Segment Performance
The Investment Banking division generated revenues of $3.77 billion, up 73% year over year. Results reflect higher underwriting revenues (up 155%), supported by robust equity and debt underwriting performance.
However, corporate lending declined 54%. Further, increased financial advisory revenues (up 43%) were on the upside owing to rise in industry-wide completed merger and acquisition transactions.
The Global Markets division recorded revenues of $7.58 billion, up 47%. This uptick indicated impressive net revenues in FICC (up 31%), fueled by solid revenues from FICC intermediation, credit products and commodities, partly offset by lower revenues in currencies. Further, FICC financing revenues grew marginally. Also, higher equities revenues (up 68%) were recorded, aided by elevated equities intermediation and financing.
The Consumer and Wealth Management division’s revenues of $1.73 billion came in 16% higher. Increased revenues from wealth management (up 13%) and consumer banking (up 32%) resulted in this upsurge.
The Asset Management division recorded revenues of $4.61 billion against negative revenues of $96 million in the prior year. This upside mainly resulted from higher net revenues in lending and debt investments, equity investments, and management and other fees. These were partially offset by lower incentive fees.
Assets under supervision were $2.20 billion, up 21% year over year.
Strong Capital Position
As of Mar 31, 2021, Common Equity Tier 1 ratio was 14.3% under the Basel III Standardized Approach, highlighting valid transitional provisions. The figure was up from the prior-year quarter’s 12.5%.
The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.5% as of Mar 31, 2021, up from the prior-year quarter figure of 5.9%.
Return on average common shareholders’ equity, on an annualized basis, was 31% in the quarter.
Capital Deployment Update
During the quarter, Goldman returned $3.15 billion of capital to common shareholders. This included $2.70 billion of share repurchases and $448 million of common stock dividends.
Management expects the 2021 pre-tax loss for consumer business, excluding the impact of reserves is likely going to be higher, driven by lower value on deposits, tighter credit standards, and additionally the investment in new General Motors credit card. Beyond 2021, Goldman will continue to invest where needed, and opportunities to build additional functionality with the digital bank, as well as to pursue further growth in partnership channel.
For the next few years, Goldman expects tax rate to be 21%.
Medium-Term and Long-Term Financial Targets
Return on Equity is expected to be greater than 13%, while return on tangible equity to be more than 14%. Efficiency ratio is expected to be around 60%. CET1 ratio is projected in the range of 13-13.5%.
Funding optimization is expected to be $1 billion. Expense efficiency savings estimated to be $1.3 billion (achieved half in 2020). Deposit growth expected to be $100 billion (reached $70 billion in 2020).
Over the long term, in Investment banking, management expects transaction banking revenues worth $1 billion and deposits worth $50 billion in more than five years horizon. Revenue generation from expanded client footprint is anticipated to be in the range of $500 million to $2 billion.
In Global Markets, $700 million expense efficiencies and $2 billion capital optimization is projected.
In Asset Management, $250 billion worth net traditional inflows (including both equity and fixed-income) and $100 billion worth net alternative inflows is anticipated. Further, capital reduction of $4 billion is expected.
In Consumer and Wealth Management, overall expansion is anticipated with the aim of building leading digital consumer bank.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 12.48% due to these changes.
At this time, Goldman has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Goldman has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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