Here’s Why Goldman’s Lukewarm Q4 Results Aren’t A Problem In The Long Run

by Trefis Team
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Goldman Sachs (NYSE:GS) may have managed to beat market expectations with its performance figures for the last quarter and full year 2013 which it released last Thursday, January 16, but given that the investment bank’s shares have dropped almost 5% since, it would seem investors were still not particularly encouraged. [1] This is likely because Goldman’s revenues were 5% lower in Q4 2013 compared to the last quarter of 2012, and expenses increased 6% over the same period resulting in the bottom line shrinking by 19%.

The second half of 2013 was a challenging period for investment banks, as weakness in debt trading hit revenues for the lucrative fixed income operations. Given the fact that competitors like JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) reported 6-7% lower FICC (Fixed Income, Currency and Commodities) trading revenues on Q4 compared to Q3, the 46% improvement in revenues for Goldman’s FICC trading desk is actually commendable (all figures adjusted for debt revaluation adjustments). The bank also leveraged improving equity market conditions over the period to double its equity underwriting revenues and to pocket healthy performance-linked fees from its asset management operations.

One factor that didn’t work in Goldman’s favor is the “Other Expenses” figure, which was hit by higher provisions for litigation and regulatory proceedings. But this is a trend seen across the banking industry over recent quarters and is something that doesn’t really affect the bank’s long term growth prospects. We are revising our price estimate for Goldman’s stock upwards from $170 to $180 to factor in the better-than-expected operating margins as well as the strong growth in asset base for the bank’s investment management business.

See the full Trefis analysis for Goldman Sachs

FICC Revenues Should Return To Normal This Quarter

Goldman’s FICC trading desk is its most valuable division according to our analysis, and is responsible for more than a quarter of the bank’s total value. The division generated $1.9 billion in revenues in Q4 – 46% higher than the dismal $1.3 billion figure for Q3 but 11% below the $2.1 billion the unit brought in for Q4 2012, after adjusting for the accounting gain or loss from a revaluation of its own debt (DVA). A primary reason for this was uncertainty in the debt markets from the Fed’s decision to taper its asset purchase program.

With the Fed finalizing its plans to commence the tapering plan this month, the interest rate environment – and consequently debt market activity – should improve this quarter.

Investment Management Operations Churns Out Record Performance From Swelling Asset Base

Goldman Sachs’ investment management unit is important to the bank not just because of its growth potential, but also because it is a stable revenue stream in a largely volatile business model. The bank put significant efforts into expanding the business over the latter half of the year by acquiring RBS’s (NYSE:RBS) money market funds as well as Deutsche Bank’s (NYSE:DB) stable value asset management business over the period.

The acquisitions were complemented by improving equity market conditions in the last quarter that saw $41 billion in long term assets flowing into the business for 2013 – the highest for Goldman since 2007. This took the bank’s asset base to record levels of $1.04 trillion at the end of the period. Record revenues of $1.6 billion for the division boosted full-year revenues to $5.5 billion, which was the second highest-ever annual figure for the investment bank.

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Notes:
  1. 2013 Annual and Fourth Quarter Results, Goldman Sachs Press Releases, Jan 16 2014 []
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