Goldman’s Strong Q1 Results Justify Trading-Focused Model, While Retail Push Unlocks More Value

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Goldman Sachs

Goldman Sachs (NYSE:GS) trounced investor expectations from its Q1 results earlier this week, as the investment banking giant made the most of the return in volatility across capital markets to report a surge in securities trading revenues. We have summarized Goldman’s Q1 2018 earnings and also detailed the major takeaways from the announcement in our interactive dashboard for the company, the key parts of which are captured in the charts below.

The strong performance should put to rest any remaining concerns regarding Goldman’s decision to retain a full-fledged trading desk (including its commodities trading arm). After all, Goldman reported unusually poor trading revenues over the first half of 2017 due to bad bets by its commodities trading business. This, coupled with an overall sluggishness in its debt trading arm for the period, raised doubts about the bank’s continued focus on trading operations, as its peers have moved towards more diversified business models.

While Goldman’s Q1 results prove that it remains a dominant player in the global securities trading industry, the bank has also made its intention to explore new avenues amply clear with its push into traditional banking services. Over recent years, the bank has begun offering online savings accounts, online-only loans through its Marcus platform, online retirement savings products through Honest Dollar, and commercial mortgages through Genesis Capital. More recently, Goldman announced its decision to acquire Clarity Money – adding personal finance to its list of offerings. Goldman’s approach should allow it to build a more well-rounded business over the coming years, which should provide more stable earnings to investors. In view of this, we have increased our price estimate for Goldman’s stock upwards from $275 to $280. The new price estimate is about 10% ahead of the current market price.

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See the full Trefis analysis for Goldman Sachs.

Increased Market Volatility Gave Securities Trading Revenues A Boost

Volatility across capital markets globally increased over February and March this year, after remaining at all-time lows over the second half of 2017 and early 2018. As increased volatility boosted the demand for securities trading services for a quarter where activity is already seasonally elevated, this helped Goldman’s FICC (fixed income, currency and commodities) revenues increase to almost $2.1 billion for the quarter – the highest since Q1 2015. At the same time, equity trading revenues crossed $2.3 billion after averaging $1.7 billion over the last ten quarters. This helped total securities trading revenues scale a high of $4.4 billion for the quarter.

Steady Inflow of Assets Helps Asset Under Supervision Grow Despite Lower Valuation

A key growth area for Goldman over recent years has been its investment management business, which has played an important role in reducing the inherent revenue volatility in Goldman’s trading-focused business model. The division fared well in Q1, with strong inflows of $13 billion into its various fund offerings. This helped the bank report a small increase in total assets under supervision (AUS) for the quarter, despite the negative impact of lower market valuations on its asset base. Goldman’s total AUS balance is now just shy of $1.5 trillion.

Increased Push Into Traditional Banking Products Driving Growth In Net Interest Income

Goldman’s growing online loans-and-deposits business helped the bank benefit from the improving interest rate environment in Q1. As its swelling deposit base provides Goldman with a low-cost source of funds, the bank’s net interest income figure rose to $918 million for the quarter – the highest since late 2014. As Goldman adds more retail banking services to its business model, we expect this figure to witness strong growth over the coming years.

We expect Goldman Sachs to report EPS of around $21.50 for full-year 2018. Taken together with a P/E ratio of 13 (which we believe is appropriate for the investment banking giant), this works out to a price estimate of $280 for Goldman’s shares, which is ahead of the current market price.

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