The Goldman Sachs Group Inc.’s (GS) second-quarter 2011 earnings per share of $1.85 were significantly below the Zacks Consensus Estimate of $2.29 per share.
Coupled with global macro-economic concerns, the results deteriorated driven by a decrease in revenue and poor performance in Institutional Client Services division. However, lower operating expenses partially offset the decline.
Net income applicable to common shareholders in the quarter was $1.1 billion compared with $908 million last quarter and $453 million in the prior-year quarter.
Behind the Headlines
Total revenue decreased 39% from the prior quarter and 18% year over year to $7.3 billion. Revenue reported also missed the Zacks Consensus Estimate of $9.1 billion, primarily due to decreases in client activity level.
Quarterly revenue, as per business segments, is as follows:
Investment Banking division generated revenues of $1.45 billion, up 54% year over year. Results reflected higher-than- expected revenues from both debt and equity underwriting along with higher revenues from the financial advisory business.
Institutional Client Services division recorded revenues of $3.52 billion, down by a significant 29% year over year. Results deteriorated due to a decline in Fixed Income, Currency and Commodities (FICC) as the uncertain challenging environment led to lower levels of client activity. Further, interest rate products, commodities and mortgages were considerably lower compared with the prior-year quarter. However, increase in revenues in equity trading (up 19% year over year) attributed to improved results in derivatives partially offset the decline.
Investing and Lending division booked revenues of $1.04 billion, down by a substantial 42% year over year. Results principally reflected a loss of $176 million from Goldman’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC). This was offset by a net gain of $686 million from other equity securities and net revenues of $200 million from debt securities and loans.
Investment Management division generated revenues of $1.27 billion, up 12% year over year. The year-over-year increase mainly reflected higher incentive fees and management and other fees.
In the second quarter of 2011, operating expenses plunged 23% to $5.67 billion compared with the prior-year quarter. Moreover, lower non-compensation expenses perpetrated the considerable fall in expenses.
Non-compensation expenses were $2.47 billion in the quarter, down 18% year over year. Expenses decreased largely due to lower net provisions for litigation and regulatory procedures of $45 million compared with $615 million in the prior-year quarter.
Evaluation of Capital
As of June 30, 2011, Goldman’s Tier 1 capital ratio under Basel I was 14.7%, up from 14.6% as of March 31, 2011. Tier 1 common ratio under Basel I was 12.9% compared with 12.8% as of March 31, 2011.
As of the second quarter of 2011, return on common shareholders’ equity, on an annualized basis, was 6.1%. Goldman’s book value per share and tangible book value per share improved to $131.44 and $121.60 respectively, in spite of the impact of the challenging environment.
Assets under management (AUM) improved to $844 billion in the quarter with $7 billion of net appreciation and $3 billion of net outflows.
Share Repurchase and Dividend Update
During the second quarter of 2011, Goldman repurchased 10.8 million shares of its common stock at an average cost per share of $139.20 and a total cost of $1.50 billion.
Goldman declared a dividend of 35 cents per share payable on September 29, 2011 to common shareholders of record as of September 1, 2011.
Performance by Peers
Comparing performances of Goldman’s peer group, Citigroup Inc. (C) reported positive results with second-quarter 2011 earnings per share of $1.09, outpacing the Zacks Consensus Estimate of 96 cents. The result also improved from the prior quarter's 99 cents and last year's 90 cents. The better-than-expected result was driven by a drop in provisions for credit losses. While the top-line headwind at Citigroup continued with revenue dropping from the prior-year period, the figure managed to exceed the Zacks Consensus Estimate. Expenses also increased year over year.
Another peer, JPMorgan Chase & Co. (JPM), reported second-quarter earnings per share of $1.34, substantially ahead of the Zacks Consensus Estimate of $1.21. Considering nonrecurring items, JPMorgan reported net income of $5.4 billion or $1.27 per share compared with $4.8 billion or $1.09 per share in the year-ago quarter. The stellar numbers were primarily supported by a substantial slowdown in provision for credit losses and higher net revenue, which were more than offset by an increase in non-interest expense and lower net interest income.
One of the company’s strong contenders Morgan Stanley (MS) will be releasing its second-quarter 2011 earnings on July 21, 2011.
Our Take
During the reported quarter, Goldman announced the sale of its mortgage-servicing subsidiary, Litton Loan Servicing to Ocwen Financial Corp. (OCN) for about $263.7 million. The transaction will provide Ocwen with $41.2 billion of servicing portfolio in the form of unpaid principal balance primarily related to non-prime residential mortgage loans. Moreover, it would provide Goldman with the servicing platforms based in Houston and Dallas. The acquisition is expected to close in the late third quarter or early fourth quarter of 2011.
Even in a volatile macro environment, Goldman continues to invest in client franchise and foresees new market expansion. In March 2011, the asset-management unit of Goldman agreed to acquire India's Benchmark Asset Management Co. (BAM), a key provider of exchange-traded funds (ETFs).
We expect Goldman to benefit from its well managed global franchise, strong capital base and industry leading position in trading and asset management. We believe Goldman’s prudent business model and strong fundamentals are expected to deliver better earnings. However, the slight decrease in client activity and overall revenue decline remain a matter of concern. Moreover, regulatory issues, including lawsuits, are expected to dent the financials of the company in the upcoming quarters.
Goldman currently retains its Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. Considering the fundamentals, we are maintaining our “Underperform” recommendation on the stock.
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
OCWEN FINL CORP (OCN): Free Stock Analysis Report
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