Goldman Outperforms, Beats Ests - Analyst Blog

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The Goldman Sachs Group Inc. ( GS ) reported its fourth-quarter 2012 earnings per share of $5.60, significantly surpassing the Zacks Consensus Estimate of $3.47. Moreover, the reported earnings outpaced the prior-year quarter's earnings of $1.84 and prior-quarter's earnings of $2.85 per share.

Amid challenging global markets and the European debt crisis, the results were driven by Goldman's record revenues with an elevation in client activity. Yet, escalated operating expenses acted as a headwind for the quarter.

Net income applicable to common shareholders in the quarter was $2.8 billion, up from $1.5 billion in the prior quarter and $978 million recorded in the prior-year quarter.

For the full year 2012, net income per share of $14.13 more than tripled from the prior-year's earnings of $4.51. Earnings were also above the Zacks Consensus Estimate of $12.04 per share.

Performance in Detail

Total revenue of Goldman surged 11% sequentially and 53% year over year to $9.2 billion in the quarter under review, resulting from an increase in overall businesses. Moreover, revenues were positively impacted by tighter credit spreads and a rise in global equity prices. Revenue also comfortably surpassed the Zacks Consensus Estimate of $7.8 billion.

For full year 2012, the company reported revenue of $34.2 billion, up 19% year over year and also surpassed the Zacks Consensus Estimate of $32.8 billion.

Quarterly revenue, as per business segments, is as follows:

Investment Banking division generated revenues of $1.4 billion, up 64% year over year. Results reflected higher-than-expected revenues from underwriting business coupled with elevated revenues from the financial advisory business. Moreover, higher revenues in equity and debt underwriting reflected an augmentation in client activity.

Institutional Client Services division recorded revenues of $4.3 billion, jumping 42% year over year. Results improved due to outstanding performance in Fixed Income, Currency and Commodities (FICC), marked by increased net revenues in credit products and mortgages and higher net revenues in currencies.

Moreover, rise in equity trading revenues (up 36% year over year) due to higher net revenues in securities services and equities client execution were partially offset by lower commissions and fees.

Investing and Lending division booked revenues of $2.0 billion in the quarter, which more than doubled from $872 million in the prior-year quarter. Results principally reflected a gain of $334 million from Goldman's investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), coupled with net gains of $789 million from other investments in equity securities.

Moreover, the segment recorded net interest income and net gains of $485 million from debt securities and loans and other net revenues of $365 million.

Investment Management division generated revenues of $1.5 billion, up 20% year over year. The year-over-year fall mainly reflected increased management and other fees and higher incentive fees.

In the fourth quarter of 2012, operating expenses ascended 3% to $4.9 billion compared with the prior-year quarter. Non-compensation expenses were $3.0 billion in the quarter, up 14% year over year. Expenses increased largely due to higher other expenses. Additionally, results included net provisions of $260 million for regulatory proceedings.

Evaluation of Capital

As of Dec 31, 2012, Goldman's Tier 1 capital ratio and Tier 1 common ratio under Basel I was 16.7% and 14.5%, up from 15.0% and 13.1%, respectively, in the prior quarter.

Return on common shareholders' equity, on an annualized basis, was 16.5% in the reported quarter. Goldman's book value per share and tangible book value per share surged to $144.67 and $134.06 from $140.58 and $129.69 respectively, at the end of the prior quarter.

Assets under management (AUM) dipped to $854 billion in the quarter compared with $856 billion in the prior quarter, reflecting net outflows of $7 billion, partially offset by net market appreciation of $5 billion.

Share Repurchase and Dividend Update

During the year 2012, Goldman repurchased 42 million shares of its common stock at an average price per share of $110.31 and a total cost of $4.64 billion. Notably, during fourth quarter 2012, the company repurchased 12.7 million shares of its common stock at an average price per share of $120.11 and a total cost of $1.53 billion. Remaining share authorization under Goldman's existing repurchase program stands at 21.5 million shares.

Concurrent with the earnings release, Goldman declared its quarterly dividend of 50 cents per share. The dividend will be paid on Mar 28, 2013 to common shareholders of record as of Feb 28, 2013.

Our Viewpoint

Overall, the results of Goldman improved significantly compared to the prior-year period, mainly driven by top-line growth. Although the company reported profits, yet increased operating expenses remain a matter of concern. Moreover, 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.

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

In Conclusion

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 a strong balance sheet.

Moreover, one can consider Goldman to be a value investment due to its steady dividend-yielding nature.

Goldman currently retains its Zacks Rank #3 (Hold). We believe such strong results might lead to positive earnings estimate revisions.

Wells Fargo & Company ( WFC ) was the first bank to kick start the results. The company achieved the twelfth consecutive quarter of growth in earnings per share by reporting earnings per share of 92 cents in fourth quarter 2012. Results improved from earnings per share of 88 cents in the prior quarter and 73 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by 5 cents.

Results at Wells Fargo benefited from improvement in top line, aided by rise in all segments' revenue. It also reported $250 million in reserve release (pre-tax), attributable to improved portfolio performance. However, the company experienced rise in non-interest expenses.

Among other Wall Street big shots, Citigroup, Inc. ( C ) and Bank of America Corporation ( BAC ) will report on January 17, while Morgan Stanley ( MS ) on January 18.

BANK OF AMER CP (BAC): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

MORGAN STANLEY (MS): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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