Strong Gains Across Segments Help Goldman Post Strong Results

Goldman Sachs (NYSE:GS) demonstrated the strength of its business model by churning out Q1 results that beat investor expectations by a huge margin on Thursday, April 16. ^[1] The investment bank leveraged the increase in activity levels for global debt and equity markets as well as the upbeat M&A industry to generate more than $10.6 billion in revenues for the period – the highest since Q1 2011. Despite the 13% jump in revenues year-on-year, the bank’s compensation expenses rose just 11%, while non-compensation expenses actually fell by 3% – allowing the pre-tax income figure to jump more than 30% compared to the year-ago period.

Strong fixed income, currencies and commodities (FICC) trading figures from rival JPMorgan (NYSE:JPM) earlier this week had raised investor expectations from Goldman, as the bank’s shares raced past $200 for the first time since the economic downturn of 2008 in anticipation of an earnings beat. Investors were clearly not disappointed by the figures Goldman reported.

The strong trading performance coupled with better-than-expected operating margins led us to increase our price estimate for Goldman’s stock to $200 – around the current market price.

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Goldman’s Trading Desks Carry Results For The Quarter

Goldman’s FICC trading desk generated almost $3.2 billion in revenues in Q1 2015 – 12% higher than the $2.8 billion figure for Q1 2014, and nearly three-times the $1.2 billion the unit brought in for Q4 2014 (after adjusting for accounting gains or losses from a revaluation of its own debt). While investment banks normally report a peak in trading revenues for the first quarter, Goldman also did well to leverage the surge in global debt as well as currency trading activity from the Swiss central bank’s unexpected decision to remove the cap on the Swiss franc. This is the first time the bank witnessed FICC trading revenues in excess of $3 billion since Q1 2013.

At the same time, Goldman’s equities trading desk churned out one of its best performances since the recession to make $2.34 billion this quarter. The bank has made more on just three occasions in the last five years – in Q1 2010, Q1 2012 and Q4 2012, with the figure being only marginally higher at $2.35 billion for each of these quarters. The $5.5 billion in total trading revenues were the best for Goldman since Q1 2012. The chart below details the bank’s total trading revenues (in $ billions) for each quarter since early 2005, and should help understand the amount of fluctuation seen in this figure over the years.

The Other Divisions Also Played Their Part

Goldman also reported some strong performance figures for its other divisions, especially for its advisory and underwriting operations. The first quarter saw a sharp increase in the volume of M&A deals completed (see Banks Eye Higher Advisory Fees In Q1 As Global M&A Activity Remains Upbeat), allowing Goldman to pocket almost $1 billion in total advisory revenues. The bank has done better than this on only two occasions in its entire history – in Q3 2007 and Q4 2007. Although debt origination fees were below average, strong equity underwriting fees helped Goldman earn $1.9 billion in total advisory and underwriting fees for Q1 2015 – the highest in more than seven years.

A steady improvement in global asset valuation also helped Goldman’s Investing and Lending division rake up nearly $1.7 billion in revenues, which was 9% higher than the figure for Q1 2014 and Q4 2014. The bank’s investment management unit, which acts as a stable revenue stream in a largely volatile business model, also chipped in with modest improvements in total revenues.

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1. 2015 First Quarter Results, Goldman Sachs Press Releases, Apr 16 2015 [↩]