Goldman Reports Strong Q1 Figures Despite Lower Trading Revenues

Weak trading activity over the first quarter could not stop Goldman Sachs (NYSE:GS) from exceeding market expectations, as the investment bank comfortably beat revenue and earnings estimates on the back of strong advisory and asset management fees as well as a notable decline in operating costs. ^[1] Although the $9.3 billion Goldman roped in this quarter was a good 8% below the $10.9 billion figure it reported over the same period last year, it must be remembered that the prior-period results almost completely hinged on trading revenues, whereas the bank reported a much more well-rounded performance this time around.

Advisory & underwriting services brought in $1.78 billion in fees – the highest for a quarter since 2007 – with M&A advisory fees contributing almost 40% of this figure. The bank also reported record inflows of long-term assets for its investment management business in Q1, which helped the division report yet another strong quarterly performance.

We maintain our $180 price estimate for Goldman’s stock, which is about 15% ahead of the current market price.

See the full Trefis analysis for Goldman Sachs

FICC Trading Bolsters Top Line Despite Below Average Quarter

Goldman’s FICC (fixed-income, currencies & commodities) 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 $2.8 billion in revenues in Q1 – almost 50% higher than the $1.9 billion figure for Q4 2013, but 14% below the $3.3 billion the unit brought in for Q1 2013 (after adjusting for accounting gains or losses from a revaluation of its own debt).

Debt market conditions have definitely improved compared to the second half of 2013, when the Fed’s decision to taper its asset purchase program led to decreased trading activity. But the markets are still soft due to fears that the Fed may pull the plug too quickly – something that explains the considerably weaker performance this quarter when seen side-by-side with the numbers from a year ago. As the interest rate environment stabilizes over the coming quarters, we expect trading activity to normalize and trading yields to climb slowly as shown in the chart below.

Investment Management Continues To Play An Important Role

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 completed integrating the recently acquired stable value asset management business from Deutsche Bank (NYSE:DB) this quarter – something that helped the investment bank notch $40 billion in net inflows for the period. This took the bank’s asset base to a record $1.08 trillion at the end of the period. Total revenues of $1.57 billion for the division were just shy of the record figure of $1.6 billion which Goldman reported last quarter. The shortfall can be traced back to lower performance-based revenues in Q1 2014 ($304 million), compared to that in Q4 2013 ($333 million).

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1. First Quarter 2014 Results, Goldman Sachs Press Releases, Apr 17 2014 [↩]