Shares of The Goldman Sachs Group, Inc. (GS) slipped over 2% in the beginning of the trading session following its fourth-quarter 2014 earnings release. Earning per share came in at $4.38, outpacing the Zacks Consensus Estimate of $4.29. However, results compared unfavorably with the year-ago figure of $4.60.
Results were aided by lower expenses. However, decline in revenues across all business segments including investment banking and institutional client services hit overall revenues.
Notably, Fixed Income, Currency and Commodities Client Execution, which is one of major sources of revenues and contributes to institutional client services revenues, has declined significantly in the quarter. Per the company release, “During the quarter, Fixed Income, Currency and Commodities Client Execution operated in an environment generally characterized by difficult market-making conditions and continued low levels of activity, particularly in credit products, interest rate products and mortgages.”
Net income applicable to common shareholders in the quarter was $2.03 billion, down 10% from $2.25 billion recorded in the prior-year quarter.
For full-year 2014, earnings per share of $17.07 beat the Zacks Consensus Estimate of $16.95 per share. Also, it was higher than the prior-year’s earnings of $15.46 per share.
Performance in Detail
For full-year 2014, Goldman reported net revenues of $34.5 billion, surpassing the Zacks Consensus Estimate of $32.3 billion. Also, it came in ahead of the prior-year net revenues of $34.2 billion.
For the fourth quarter, net revenue declined 12% year over year to $7.7 billion. Results were mainly affected by lower revenues from investment banking, market making and other principal transactions. Also, revenues came in slightly below the Zacks Consensus Estimate of $7.8 billion.
Quarterly revenues, as per business segments, are as follows:
Investment Banking division generated revenues of $1.4 billion, down 16% year over year. The decline was primarily due to lower debt as well as equity underwriting that led to a 34% year-over-year decrease in total underwriting revenues. However, net revenues in financial advisory increased 18% year over year, the highest since 2008.
Institutional Client Services division recorded revenues of $3.1 billion, down 8% year over year. Results reflected a 29% year-over-year decline in revenues in Fixed Income, Currency and Commodities Client Execution (FICC), partially mitigated by higher revenues from equities client execution, increased commissions and fees as well as securities services.
Investing and Lending division booked revenues of $1.5 billion in the quarter, down 26% year over year. Results included net gains of $982 million from investments in equities, net gains and net interest income of $358 million from debt securities and loans, and other net revenues of $192 million pertaining to the firm’s consolidated
investments.
Investment Management division generated revenues of $1.6 billion, down 2% year over year. Results reflected a 40% decline in incentive fees, partially offset by increased management and other fees along with higher transaction revenues.
Goldman’s operating expenses declined 14% to $4.5 billion compared with the prior-year quarter. Expenses increased largely due to lower compensation and employee benefits (down 11% year over year) as well as other non-compensation expenses (down 17% year over year). However, brokerage, clearing, exchange and distribution fees (component of non-compensation expenses) increased year over year.
Evaluation of Capital
Goldman exhibited a strong capital position in the reported quarter. As of Dec 31, 2014, the company’s Common Equity Tier 1 ratio was 12.2% under the Basel III Advanced Approach, reflecting the valid transitional provisions.
Return on average common shareholders’ equity, on an annualized basis, was 11.1% in the reported quarter. Goldman’s book value per share increased around 7% to $163.01. Also, tangible book value per share rose 7 % to $153.79, as compared with the prior-year period end.
Share Repurchase
During fourth-quarter 2014, Goldman repurchased 6.6 million shares of its common stock at an average price per share of $188.14 and a total cost of $1.25 billion. Remaining share authorization under Goldman’s existing repurchase program stands at 25.4 million shares.
For 2014, the company repurchased 31.8 million shares of its common stock for a total cost of $5.47 billion.
In Conclusion
Though Goldman concluded the final quarter with decline profits, we believe the company is well positioned to combat operating challenges in the upcoming quarters. We expect Goldman to benefit from its well-managed global franchise, strong capital base and recent investments in the near future.
Though there are concerns related to the impact of legal and regulatory issues and its global exposure, equity-centric activities in the U.S. are expected to support Goldman’s results in the upcoming quarters with continued recovery in the capital markets.
An investor with an appetite to absorb risks related to the market volatility should not be disappointed with an investment in Goldman over the long haul. Goldman’s fundamentals remain highly promising with a diverse business model and strong balance sheet.
Moreover, Goldman is justly considered to be a value investment due to its steady dividend-yielding nature. This banking major currently carries a Zacks Rank #3 (Hold).
Performance of Other Major Banks
Wells Fargo & Company’s (WFC) fourth-quarter 2014 results met expectations. The financial bigwig came out with earnings per share of $1.02, meeting the Zacks Consensus Estimate.
Citigroup Inc. (C) reported fourth-quarter adjusted earnings per share of 6 cents, missing the Zacks Consensus Estimate of 9 cents.
Bank of America Corporation’s (BAC) fourth-quarter 2014 adjusted earnings of 32 cents per share came a penny ahead of the Zacks Consensus Estimate. However, after considering certain non-recurring items, earnings per share stood at 25 cents compared with 29 cents earned in year-ago quarter.
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