Goldman Still Worth $210 Despite Weak Q3 Performance

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Goldman Sachs

Goldman Sachs (NYSE:GS) reported a worse-than-expected performance for the third quarter of 2015 on Thursday, October 15, as the bank witnessed a reduction in revenues across its operating divisions. [1] Goldman’s trading results were hammered by a marked reduction in client activity due to volatile market conditions around the globe, and mark-to-market losses on its debt and equity investment portfolio eroded a bulk of its profits. Underwriting fees also headed lower primarily due to a sharp reduction in the volume of equity underwriting deals over Q3. Finally, the bank was forced to set aside $416 million to increase its legal provisions – shrinking the bottom line further.

But things were not all bad for Goldman this quarter. Notably, the bank’s strength in the M&A industry helped it report advisory fees in excess of $800 million for the third consecutive quarter. Also, Goldman’s investment management division fared quite well thanks to net inflows of $41 billion into its long-term fund offerings. This allowed the bank to report a quarter-on-quarter increase in the size of its assets under supervision (AUS) despite the depreciation in market value across asset classes – something none of the other major banks have reported yet.

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Although Goldman’s results have been hit harder than its peers by weak trading conditions, the bank still commands the largest share in the global securities trading industry. With all major banking giants implementing cuts to their trading operations over recent years, Goldman’s decision to leave its trading desks unchanged will allow it tighten its grip on the industry over subsequent quarters – once the volatile market conditions dissipate.  This is why we stick to our $210 price estimate for Goldman’s stock, which is around 15% ahead of the current market price.

See the full Trefis analysis for Goldman Sachs

FICC Trading Biggest Factor Behind Shrinking Top Line

Goldman’s fixed-income, currency and commodities (FICC) trading desk generated just over $1.31 billion in revenues in Q3 2015 – a good 38% lower than the $2.1 billion figure for Q3 2014, and almost 10% below the sub-par $1.45 billion in revenues for the unit in Q2 2015 (after adjusting for accounting gains or losses from a revaluation of its own debt). While a reduction in these revenues was expected given the poor levels of trading activity worldwide, Goldman’s FICC trading revenues saw a steeper fall than its peers. To put things in perspective, JPMorgan (NYSE:JPM) reported a reduction of 23% in these revenues year-on-year, while Bank of America (NYSE:BAC) saw a decline of 11%.

Although Goldman’s equities trading desk managed to post 9% growth in revenues compared to the year-ago period, it could not match up to the exceptionally strong second quarter. Adjusted equity trading revenues of $1.7 billion for Q3 2015 were 12% lower than the almost $2 billion figure reported in Q2 2015. Taken together, the two trading desks made just $3 billion in total revenues – making this the worst showing by Goldman in any quarter since the economic downturn except for Q3 2013 (when the total was $2.9 billion).

Mixed Investment Banking Results Due To Underwriting Weakness

After posting two of its best ever quarterly performances over the first two quarters of the year, Goldman’s advisory and underwriting operations (which include the advisory, debt underwriting and equity underwriting units) reported a sizable drop in revenues for the third quarter. Total advisory and underwriting fees for Q3 2015 were $1.56 billion – 23% lower than the exceptionally strong figure of $2 billion reported in the previous quarter. These fees increased 6% compared to the previous year, though, thanks to yet another strong showing by the M&A advisory unit. With the volume of M&A deals remaining upbeat for a third consecutive quarter, Goldman’s M&A advisory fees stayed above $800 million. While debt underwriting fees also saw a sizable improvement year-on-year, the gains were more than offset by a sharp reduction in equity underwriting fees, which fell to $190 million for the quarter from $426 million in Q3 2014 and $595 million in Q2 2015 – making this the worst quarterly performance since Q3 2012.

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Notes:
  1. 2015 Third Quarter Results, Goldman Sachs Press Releases, Oct 15 2015 []