Goldman Sachs (NYSE:GS) will come out with its earnings figure for the second quarter on July 17. Things were clearly not so rosy for the global investment bank the last three months as they were the last quarter. The escalating debt situation in Europe and the slowdown in growth for U.S. and China over this period created conditions similar to the latter half of 2011, with increased volatility expected to hit trading revenues.
Demand for advisory and underwriting services also, understandably, fell this quarter as firms across the globe were reluctant to raise capital given the fears of a recession, especially following Facebook’s poor performance following its IPO. Consequently, we do not rule out the possibility of Goldman and rival Morgan Stanley (NYSE:MS) reporting revenue figures less than half of what they generated last quarter. JPMorgan’s (NYSE:JPM) earnings announcement this Friday should help give a better picture of what to expect from other investment banks next week.
Our $128 price estimate for Goldman’s stock is at a 35% premium to the bank’s current market price. We believe the difference can be attributed to the significant pessimism among investors toward investment bank stocks given the deteriorating economic condition in several European nations and a sizable exposure that these investment banks have to these economies.
Facebook’s IPO Arguably The Best Thing That Happened To Goldman This Quarter
Equity markets across the globe have struggled this quarter due to the uncertain macro-economic conditions prevalent. And the high volatility in share prices with investors reacting sharply to every single piece of information about Eurozone nations coming their way also made trading gains elusive. This clearly drove down Goldman’s client-driven equity trading revenues for the period – with the final figure for the quarter expected to be far below the billion dollars equities earned by the bank last quarter.
There is a silver lining in the dark equities cloud for Goldman though. The bank cashed in on a huge chunk of its share in Facebook at the time of the social networking company’s IPO this May. Goldman sold 28.7 million Facebook shares at the offer price of $38 to pocket a handsome $1.09 billion in cash (see Banks Earn Nice Facebook Fees Despite Shares Trading Lower Post IPO).
And The Bank Tried To Make The Best Of Slimming Underwriting Opportunities
Data compiled by Thomson Reuters over the quarter shows that the period was the worst since Q1 2009 in terms of global advisory and underwriting activities.  Debt capital raised globally in Q2 was more than 36% lower than that raised in Q1, whereas equity capital raised was about 16% lower. Overall, Goldman’s rank among debt underwriters fell from sixth for the first half of 2011 to eighth for the first half of 2012.
Imputed fees data provided by Thomson Reuters points to a 16% q-0-q decline in Goldman’s debt underwriting fees revenue, and a 12% decline in q-0-q equity underwriting fees revenue. The company’s reported revenues for these business units can be expected along the same lines.Notes: