The optimism that Goldman Sachs’ (NYSE:GS) performance figures for the first quarter lent investors proved to be short-lived when within hours of the earnings release the global investment firm’s top management aired concerns about weak economic conditions that are likely to drag down results over coming months. Goldman performed better than expected in Q1 2013, generating revenues in excess of $10 billion thanks to record debt underwriting revenues, an uptick debt trading conditions and marked appreciation in the value of equity investments.  But CEO Lloyd Blankfein’s admission that the “potential for macro-economic instability was felt in the quarter and constrained overall corporate and investor activity” and CFO Harvey Schwartz’s concerns about the continuing economic uncertainty in Europe and the budget-related stalemate in the U.S. led Goldman’s shares lower over trading on Tuesday.
We, however, choose to play the situation by ear and for the time being have increased our price estimate for Goldman’s stock marginally upwards from $157 to $160, to factor in the investment bank’s new-found vigor in global debt capital market.
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Goldman’s Focus On Debt Underwriting Has Helped Generate Record Revenues
Goldman’s advisory and underwriting business roped in just under $1.6 billion in revenues for the quarter – the highest since Q4 2009. And while M&A advisory revenues remained soft, there was a marked improvement in underwriting fees – especially in debt capital markets (see Banks Pocket Higher Debt Origination Fees As Issuance Climbs In Q1). Aided by an increase in debt issuance activity by corporates across the world who sought to profit from increasing demand for high-yield investment options, Goldman earned $694 million through debt originations over the period – a personal record.
It must be mentioned here that the debt origination market is dominated by 5 banks – JPMorgan (NYSE:JPM), Deutsche Bank (NYSE:DB), Barclays (NYSE:BCS), Citigroup (NYSE:C) and Bank of America-Merrill Lynch (NYSE:BAC) who have held the top five spots in the industry for a decade now. Goldman’s effort to make it to the list got it to the 6th position this quarter – higher than ever before. ((Global Debt Capital Markets Q1 2013, Thomson Reuters Deals Intelligence))
And The Uptick Equity Market Contributed To A Chunk Of This Quarter’s Topline
For quite a few quarters now, Goldman’s largest source of income has been its fixed-income trading unit (at least $2 billion each quarter) followed by its asset management fees (~$1 billion each quarter). The equity trading unit comes in next, finally followed by Goldman’s gains in equity investments (excluding ICBC). But strong global cues resulted in equity markets around the world rallying over the first quarter, allowing Goldman’s equity investments to become the second largest revenue stream in Q1.
Equity investments added $1.1 billion in revenues for the quarter – 40% higher than the figure in Q4 2012 and 24% above that for Q1 2012. We include Goldman’s equity investment revenues as a part of the equities division as a part of our analysis. You can see how an increase in equity trading assets help increase Goldman’s share value by making changes to the chart below.Notes: