Driven by revenue strength, Goldman Sachs GS reported third-quarter 2020 earnings per share of $9.68, significantly surpassing the Zacks Consensus Estimate of $5.58. Also, the bottom-line figure compares favorably with the earnings of $4.79 per share recorded in the year-earlier quarter.
The stock rallied more than 2% in pre-market trading, reflecting investors’ optimism with the results. Notably, the full-day trading session will display a clearer picture.
With an increase in global equity prices and tightening of credit spreads, the bank’s results were aided by higher Fixed Income, Currency and Commodities Client Execution (FICC) revenues during the reported quarter. Also, the underwriting business displayed strength. In addition, wealth management and consumer banking business witnessed an upswing, reflecting rise in credit card loans. Moreover, fall in provisions was a tailwind.
The investment bank, nevertheless, disappointed with the rise in operating expenses. Additionally, lower financial advisory revenues, due to the decline in industry-wide completed mergers and acquisitions transactions, played spoilsport. Also, corporate lending revenues disappointed.
Revenues Climb, Expenses Up
Goldman’s net revenues were up 30% year over year to $10.78 billion in the July-September quarter. The revenue figure also beat the Zacks Consensus Estimate of $9.19 billion.
Quarterly revenues, as per business segments, are as follows:
The Investment Banking division generated revenues of $2 billion, up 7% year over year. Results suggest higher underwriting revenues (up 60%), supported by improved equity and debt underwriting revenues on elevated volumes. Yet, corporate lending reported slumped 86% year over year. Further, decreased financial advisory revenues (down 27%) were on the downside due to fall in industry-wide completed merger and acquisition transactions.
The Global Markets division recorded revenues of $4.6 billion, up 29% year over year. This upside indicates record net revenues in Fixed Income, Currency and Commodities Client Execution (up 49%), fueled by solid revenues from credit products, interest rate products, mortgages and commodities. However, FICC financing was on the downside.
Furthermore, higher equities revenues (up 10%) were recorded, aided by elevated equities intermediation.
The Consumer and Wealth Management division’s revenues of $1.5 billion came in 13% higher year over year during the September-end quarter. Increased revenues from wealth management (up 6%) and consumer banking (up 50%) resulted in this upsurge.
The Asset Management division recorded revenues of $2.8 billion, substantially up 71% year over year. This upside mainly resulted from higher net revenues in equity investments, lending and debt investments, along with higher incentive and management and other fees.
Assets under supervision were $2.04 billion, up 15.9% year over year.
Total operating expenses flared up 6% year over year to $5.95 billion. Rise in compensation and benefits, brokerage, clearing, exchange and distribution fees, communications and technology and other expenses chiefly resulted in this upsurge.
Notably, net provisions for litigation and regulatory proceedings of $6 million were recorded as compared with the prior-year quarter’s $47 million.
Provision for credit losses was $278 million in the third quarter, down 4.5% from the prior-year quarter figure of $291 million due to reduced reserves from paydowns on corporate lines of credit and consumer installment loans. These decreases were partly negated by reserve increases from individual impairments associated with wholesale loans and growth in credit card loans.
Strong Capital Position
Goldman displayed a robust capital position in the reported quarter. As of Sep 30, 2020, the company’s Common Equity Tier 1 ratio was 14.5% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior quarter’s 13.3%.
The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.8% at the end of the July-September quarter, up from the prior-quarter figure of 6.6%.
Return on average common shareholders’ equity, on an annualized basis, was 17.5% in the quarter. This reflects highest quarterly ROE since 2010.
Goldman’s results highlight an impressive quarter. A solid underwriting business and fixed income revenues are driving factors. In addition, the company’s well-diversified business, apart from its core investment banking operations, continues to ensure earnings stability.
The bank’s focus to capitalize on new growth opportunities through several strategic investments, including the digital consumer deposit platform, will likely bolster overall business growth. Nonetheless, costs rising from technology investments and market development remain near- to medium-term headwinds. Downtrend in financial advisory revenues is also likely to impede top-line growth.
The Goldman Sachs Group, Inc. Price, Consensus and EPS Surprise
The Goldman Sachs Group, Inc. price-consensus-eps-surprise-chart | The Goldman Sachs Group, Inc. Quote
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 Mega Banks
Citigroup C delivered an earnings surprise of 38.6% in third-quarter 2020 on robust market revenues. Earnings per share of $1.40 for the quarter handily outpaced the Zacks Consensus Estimate of $1.01. Results were, however, down significantly from the prior-year quarter.
Citigroup recorded higher revenues on investment banking and market revenues during the reported quarter. Notably, equity market revenues (up 15%) were impressive on strong performance in cash equities and derivatives, partially offset by lower prime finance revenues, while fixed income revenues (up 18%) were also on an upswing, reflecting strength in spread products and commodities.
Moreover, investment banking revenues (up 13%) increased on a solid underwriting business, partly muted by lower advisory business. However, consumer banking disappointed due to the continued impact of pandemic. Moreover, elevated cost of credit and elevated expenses were major drags.
Unexpected lower provisions along with improvement in trading and mortgage banking businesses drove JPMorgan’s JPM third-quarter 2020 earnings of $2.92 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.35. Results included legal expenses of $524 million or 17 cents per share. Excluding these, earnings amounted to $3.09 per share.
During the quarter, the company reported net reserve releases, which led to lower credit costs. In a statement, the CEO Jamie Dimon said, “we maintained our credit reserves at $34 billion given significant economic uncertainty and a broad range of potential outcomes.”
Among others, Morgan Stanley MS will report earnings numbers on Oct 15.
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