Subdued Trading Activity, Declining Operating Margin Would Have Hurt Goldman’s Q2 Results

by Trefis Team
Goldman Sachs
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Goldman Sachs (NYSE: GS) is slated to release its Q2 2019 results on Tuesday, 16th July. Consensus figures point to a 4% decline in the investment bank’s revenues year-on-year to $9.05 billion, and a 14% slide in the EPS figure to $5.15. Per Trefis, Goldman Sachs’ stock has a fair value of $230, which is 10% higher than the current market price. We have analyzed how Goldman Sachs’ revenues & expenses have changed over recent quarters in an interactive dashboard along with our expectations for full-year 2019. You can modify Trefis forecasts to see the impact of changes on Goldman’s valuation. Additionally, you can see more Trefis data for financial services companies here.

A Quick Look At Goldman’s Sources of Revenue

Goldman Sachs reported $36.6 billion in Total Revenues in FY 2018 (CAGR 2015-2018: 2.7%). This included 4 revenue streams.

  • Investment Banking: $7.9 billion in FY 2018 (22% of Total Revenues) – This can be divided into two sub-divisions: Mergers & Acquisitions Advisory, and Equity Underwriting & Debt Origination (e.g. Initial Public Offerings, private placements etc.).
  • Institutional Client Services: $13.5 billion in FY 2018 (37% of Total Revenues) – It includes Equity Trading (e.g. market making, trading in equities, equity related products, structures and derivatives) and Fixed Income, Currency and Commodity (FICC) Trading.
  • Investment Management: $7.0 billion in FY 2018 (19% of Total Revenues) – This represents Goldman’s asset management arm, which provide individual investors with mutual fund and alternative investment products, and institutional clients with a fully-integrated asset management offering.
  • Investing & Lending: $8.2 billion in FY 2018 (23% of Total Revenues) – It represents investing and relationship-lending activities across asset classes, including debt & equity securities, and real estate

How Have Goldman Sachs’ Revenues & Expenses Changed Over Recent Quarters?

  • In Q1 2019, Goldman Sachs reported Total Revenues of $8.81 billion, down by 13% y-o-y. This decline was primarily due to an 18% reduction in Institutional Client Services (ICS) revenues coupled with a 14% drop in Investing & Lending revenues.
  • Total expenses were down 8% y-o-y due to a reduction in Compensation & Benefit costs and lower Brokerage, Clearing, Exchange & Distribution fees.
  • However, Goldman’s focus on growing its stable revenue streams like investment management and lending have resulted in an overall reduction in its profit margins. This coupled with weaker investment banking revenues are expected to eat into the bank’s bottom line this time around.

Goldman Sachs’ Key Revenue Drivers

Equity Underwriting Fees: In Q1 2019, Equity Underwriting fees slumped 34% y-o-y due to a substantial reduction in Initial Public Offerings (IPO) deals throughout the Industry. We expect the trend to continue in subsequent quarters – dragging down Goldman’s Equity Underwriting fees by 11% in 2019 compared to 2018.

Assets under Supervision (AUS): Goldman’s Assets under Supervision (AUS) have grown at a CAGR of 7.2% over the last three years (2015-2018). The strong growth continued in Q1 2019 with the bank reporting $57 billion in net inflows. We expect this trend to continue in subsequent quarters and push the AUS figure to over $1.6 trillion by the end of the year.

Equities Trading Assets: Goldman Sachs saw a significant reduction in the size of its Equities Trading portfolio last year as a result of the slump in equity market valuation in December. While equity market valuation has recovered over recent months, Goldman’s equity trading revenues in Q1 2019 were 24% lower than the figure for the previous year. We expect the size of equity trading assets to improve in subsequent quarters, although a lower yield on equity trading should weigh on equity trading revenues.

Goldman Sachs’ Outlook For Full Year 2019

  • Goldman Sachs is expected to report $36.1 billion in Total Revenues for 2019, which is 1.4% lower than the figure for 2018.
  • Institutional Client Services (ICS) revenues are expected to decrease 6% primarily due to lower market volumes in Equities Trading. However, an expected growth of 5% in Investing & Lending revenues should partially offset the impact on the top line.
  • Although transaction volumes and incentive fees for the Investment Management division have fallen steadily over recent years, growth in AUS will help revenues for the segment remain largely at the same level as 2018.
  • Total Expenses should remain unchanged from the level seen in 2018. However, Net Income is expected to fall 8% y-o-y to $9.6 billion due to a reduction in total revenues and higher expected tax rate for the year.
  • Goldman Sachs is expected to have repurchased $1.25 billion worth of shares in second quarter. We expect the same trend to continue in subsequent quarters and help its EPS figure reach $24.67 for FY 2019.
  • EPS of $24.67 coupled with our forward P/E multiple of 9.3x represents a price estimate of $230 for Goldman’s stock – a figure roughly 10% ahead of the current market price.

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