Goldman (GS) Q2 Earnings Beat, Provisions Up on Coronavirus Scare

Goldman Sachs GS reported second-quarter 2020 earnings per share of $6.26, significantly surpassing the Zacks Consensus Estimate of $3.97. Also, the bottom-line figure compares favorably with the earnings of $5.81 per share recorded in the year-earlier quarter.

The stock rallied more than 5% in pre-market trading, reflecting investors’ optimism with the results. Notably, the full-day trading session will display a clearer picture.

With the market volatility flaring up on the rising coronavirus concerns, the bank’s results were aided by higher Fixed Income, Currency and Commodities Client Execution (FICC) revenues during the reported quarter. Also, underwriting business displayed strength. In addition, wealth management and consumer banking business reported an upswing, reflecting rise in deposit balances and credit card loans.

The investment bank, nevertheless, disappointed with the rise in operating expenses and provisions. Additionally, lower financial advisory revenues, due to the decline in industry-wide completed mergers and acquisitions transactions, played spoilsport. Moreover, corporate lending revenues disappointed.

Revenues Climb, Expenses Up

Goldman’s net revenues were up 41% year over year to $13.3 billion in the reported quarter. The revenue figure also beat the Zacks Consensus Estimate of $10.1 billion.

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

The Investment Banking division generated revenues of $2.7 billion, up 36% year over year. Results suggest higher underwriting revenues (more than doubled year over year), supported by elevated equity and debt underwriting revenues on elevated volumes. Yet, corporate lending reported negative revenues. Further, decreased financial advisory revenues (down 11%) were on the downside due to fall in industry-wide completed mergers and acquisitions transactions.

The Global Markets division recorded revenues of $7.2 billion, up 93% year over year. This upside indicates record net revenues in Fixed Income, Currency and Commodities Client Execution (more than doubled year over year), driven by solid revenues from currencies, credit products, interest rate products and commodities. Also, FICC financing was on the upside.

Furthermore, higher equities revenues (up 46%) were recorded, aided by elevated equities intermediation.

The Consumer and Wealth Management division’s revenues of $1.4 billion came in 9% higher year over year during the June-end quarter. Increased revenues from wealth management (up 7%) and consumer banking (up 19%) resulted in this upsurge.

The Asset Management division recorded revenues of $2.1 billion, down 18% year over year. This decline mainly resulted from lower net revenues in equity investments, partly negated by elevated revenues in lending and debt investments, along with higher incentive and management and other fees.

Asset under supervision were $2.1 billion, up 23.5% year over year.

Total operating expenses flared up 37% year over year to $8.4 billion. Rise in almost all components of expenses resulted in this upside.

Notably, net provisions for litigation and regulatory proceedings of $945 million were recorded as compared with the prior-year quarter’s $66 million.

Provision for credit losses was $1.59 billion in the second quarter, significantly up from the prior-year quarter figure of $214 million due to elevated provisions in wholesale loans as well as consumer loans on more-than-expected deterioration in the economic environment.

Strong Capital Position

Goldman displayed a robust capital position in the reported quarter. As of Jun 30, 2020, the company’s Common Equity Tier 1 ratio was 12.4% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior quarter’s 12.3%.

The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.7% at the end of the April-June quarter, up from the prior-quarter figure of 5.9%.

Return on average common shareholders’ equity, on an annualized basis, was 11.1% in the quarter.

Goldman continued to optimize the digital consumer deposit platforms. Notably, consumer deposits escalated a record $20 billion in the reported quarter to $92 billion.

Goldman initiated its transaction banking business in the U.S. providing deposit-taking, payments, liquidity management, and escrow services. During the quarter, deposits on the platform surged $16 billion to $25 billion.

Conclusion

Goldman’s results highlight an impressive quarter. Strong 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.

Its 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 revenue growth.
 

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. price-consensus-eps-surprise-chart | The Goldman Sachs Group, Inc. Quote

Currently, Goldman carries a Zacks Rank #3 (Hold). You can see 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 6.4% in second-quarter 2020 on robust revenue strength. Earnings per share of 50 cents for the quarter handily outpaced the Zacks Consensus Estimate of 47 cents. Results were, however, down significantly from the prior-year quarter.

Citigroup recorded higher revenues on investment banking and market revenues during the reported quarter. Though equity market revenues disappointed on a more challenging environment in derivatives, and prime finance and securities services revenues declined, fixed income revenues were on an upswing reflecting strength in rates and currencies, spread products and commodities. Moreover, investment banking revenues increased on solid underwriting business, partly muted by lower advisory business. Additionally, fall in expenses was on the upside. However, elevated cost of credit due to the pandemic is a major drag.

A significant improvement in trading and mortgage banking businesses drove JPMorgan’s JPM second-quarter earnings of $1.38 per share. The bottom line surpassed the Zacks Consensus Estimate of $1.34. The results included provision builds due to deterioration in the macro-economic backdrop, bridge book markups and gains related to funding spread tightening on derivatives. Excluding these, earnings per share amounted to $3.27.

Wells Fargo WFC reported second-quarter 2020 loss per share of 66 cents, which chiefly resulted from a reserve build of $8.4 billion for the coronavirus outbreak-related crisis. The Zacks Consensus Estimate for the same was pegged at a loss of 7 cents. Reduced net interest income on lower rates and a disappointing fee income negatively impacted the company’s results. Notably, lower mortgage banking revenues and service charges on deposit accounts were major drags.

Provisions also soared on the coronavirus crisis during the reported quarter. Further, rise in non-interest expenses and a decline in loan balance acted as headwinds.

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