Are Goldman’s Strong Results Sustainable ?

Goldman Sachs (NYSE:GS) came out with its performance figures for the second quarter of the year before the market opened this Tuesday, and despite the fact that the global investment banking stalwart beat expectations by reporting a net income of $1.9 billion for the period its shares lost 2% of their value over the day. ^[1] To put things in perspective, Goldman’s earnings for this quarter are double the Q2 2012 figure of $962 million and about 15% lower than the seasonally strong first quarter of the year making it one of the bank’s best quarterly result in recent quarters. So what triggered the sell-off among investors?

The answer becomes evident from a closer look at Goldman’s various revenue streams and how they have changed over the quarters. The bank clearly did its best to cash in on the uptick in the equity market as is seen from the fact that its equity underwriting desk and equity trading operations managed to repeat their strong performance for Q1 yet again in Q2. And the uncertainty about interest rates towards the end of the quarter visibly eroded a sizable chunk of Goldman’s debt trading profits – something the bank itself foretold at the end of last quarter (see Goldman’s Strong Q1 Figures Come With A Warning Of Tough Times Ahead).

But what really stands out are the revenues for the ‘Investing and Lending’ business, which houses Goldman’s private equity unit besides other proprietary investment units. This business made $1.4 billion in revenues in Q2 2013 – a seven-fold jump from the $200 million in Q2 2012 largely thanks to the benefit from Goldman’s sale of its remaining stake in the Industrial and Commercial Bank of China (ICBC) for $1.1 billion (see Goldman Cashes In Its Remaining Stake In ICBC). With the final stake in ICBC sold, and with the turmoil in debt markets expected to continue in the near future, Goldman will really have to work hard to maintain its top-line figures over coming quarters.

However, there are some positive factors at play here which cannot be overlooked. Firstly, Goldman shelled out taxes at an effective rate of less than 27% this quarter compared to 33% in Q1. And its asset management business continues to build steam – bringing in a stable source of revenues to an other volatile business model. As our analysis of Goldman already prices in the slowdown in debt markets over a few quarters, the positive impact of these two factors led us to revise our price estimate for Goldman’s stock upwards from $160 to $170.

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1. Second Quarter 2013 Results, Goldman Sachs Press Releases, Jul 16 2013 [↩]