Legal Costs Mar A Strong Operating Performance By Goldman In Q2

Goldman Sachs (NYSE:GS) did not let weak global debt trading activity over the second quarter affect its revenues for the period, as it leveraged the strength of its advisory, underwriting, and investment management operations to churn out another strong quarterly performance. ^[1] The premier investment bank did well to report revenues that were roughly the same as the figure for the year-ago period, but a $1.45 billion legal charge from its mortgage-related lawsuit ate up nearly half the profits for the quarter.

Goldman’s advisory and underwriting unit reported more than $2 billion in quarterly fee revenues for just the second time in the bank’s history (the other instance being Q2 2007) as a result of marked improvements in the M&A industry and in equity capital markets. The investment management unit also chipped in with a record $1.65 billion in revenues this quarter. The bank also did well on the cost front, as total operating costs fell by more than 2% year-on-year (adjusted for legal costs) despite revenues being roughly the same.

The strong performances by the bank’s investment banking and investment management divisions coupled with steady improvements in the operating margin led us to increase our price estimate for Goldman’s stock from $200 to $210. The new estimate is around the current market price.

See the full Trefis analysis for Goldman Sachs

FICC Trading Desk’s Results Were Underwhelming

Goldman’s FICC trading desk generated $1.45 billion in revenues in Q2 2015 – 35% lower than the $2.2 billion figure for Q2 2014, and less than half the $3.1 billion the unit brought in for Q1 2015 (after adjusting for accounting gains or losses from a revaluation of its own debt). This was largely expected though, as Greece’s precarious debt situation and the uncertainty about growth in China negatively affected the level of activity in global debt markets. Competitors JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC) also reported sharp declines in FICC trading revenues in their Q2 earnings earlier this week.

Goldman’s equities trading desk fared much better though, as it generated just under $2 billion in revenues over Q2. This represents a 23% improvement year-on-year, although the figure fell 14% sequentially. The $3.5 billion in total trading revenues was substantially lower than the $5.5 billion for Q2 2015, and also 10% lower than that for the year-ago period.

Investment Banking Arm More Than Made Up For The Shortfall

The highlight of Goldman’s Q2 results was the performance of its advisory and underwriting operations, which include the advisory, debt underwriting and equity underwriting units. With the volume of M&A deals remaining upbeat for a second consecutive quarter, Goldman’s M&A advisory fees for Q2 were a solid $821 million. The bank has done better than this on only one other occasion since the economic downturn – in the first quarter of this year, when it reported $961 million.

The combined $1.78 billion in M&A advisory fees for the first six months also made it the best first half in the bank’s history in this regard. Although the $603 million in debt origination fees for this quarter was below the exceptionally high figure of $730 million for Q2 2014, strong equity underwriting fees of $595 million helped Goldman notch $2 billion in total advisory and underwriting fees for Q2 2015 – the highest in more than seven years. In fact, this is only the third time in Goldman’s history when these fees were higher than the bank’s FICC trading revenues (the other two instances being Q4 2008 and Q4 2014).

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1. 2015 Second Quarter Results, Goldman Sachs Press Releases, July 16 2015 [↩]