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Stay Away From Goldman Sachs Despite Earnings Beat

Sunday - 4/21/2013, 7:30pm  ET

The earnings seasons has already kicked off and Goldman Sachs surprised analysts when it reported its performance for the first quarter of the current year. Both earnings and revenues exceeded their respective expectations on higher investment banking revenues. The remainder of the investment thesis will review the latest earnings and compare them with its peers.

Goldman Sachs reported its performance on April 16. Earnings per share of $4.29 were $0.43 per share ahead of the consensus mean estimate, while revenues of $10.09 billion surpassed expectations by $0.49 billion. The surge in the top line was partially offset by a 7% decline in the bank’s bond trading, which is considered the biggest money maker. This is a cause of concern for the Street as fixed income trading revenues have never felt the pressure equities trading revenues did after the growth in the online equities trading platforms.

Among other highlights is the improvement in Goldman's investment banking revenues of $1.57 billion, which increased 36% over the prior year. The increase was attributed to a significant 63% gain in the bank’s underwriting business. Besides, the bank’s fixed income, currency and commodities division’s revenues fell 7% compared to the linked year. Meanwhile, the bank’s fourth quarter expenses remained flat compared to a year ago. Both compensation and non-compensation expenses were flat. However, the compensation ratio fell to 43% from 44%. During the quarter, the bank repurchased $1.52 billion.

The 12% sequential growth in Investment Banking was attributed to a healthy trend in equity underwriting, which increased 28% over the prior quarter. This was well supported by the 17% growth in revenues from debt underwriting, partially offset by a 5% sequential decline in financial advisory revenues.

Institutional Client Services revenues witnessed 18% growth, largely due to a 58% increase in Fixed income, Currency and Commodities Client Execution, supported by increases in equities client execution and commissions and fees, yet partially offset by a 61% decline in securities services. While equity trading fell 15% to $1.92 billion, the concern was the plunge in fixed income trading.

Revenues from the bank’s Investing and Lending segment increased 5% over the prior quarter. Within this business segment, the bank bets on its own capital. The Investment Management segment of the bank declined 13% over the prior quarter on lower management and other fees.

Despite the well managed expenses and earnings beat, the results were overshadowed by the deterioration in the bank’s trading results. This is because the bank’s investment banking and its own investments are negligible when compared to its equity and fixed income trading.

Competition

Among Goldman Sachs’ peers, JPMorgan Chase , Citigroup and Wells Fargo have already reported their performances for the first quarter of the current year. Most of these peers were able to beat analysts’ mean estimates, while only Citigroup was able exceed both its top (+3.2%) and bottom line estimates. JPMorgan, Citigroup and Wells Fargo posted 14.4%, 10.3% and 4.5% earnings beats, respectively. Among other trends seen in the US banking sector are decreasing operating expenses followed by pressure on the top lines, coupled with compressing net interest margins.

Given the slowdown in Goldman Sachs’ trading revenues you can expect a similar trend in Morgan Stanley’s latest disclosures today.

Conclusion

While the environment remains challenging for US banks to grow their top lines, they have done a good job expanding bottom lines, while concentrating on expense management. However, at Goldman Sachs, the situation is a bit different. Despite the earnings beat, analysts and investors are more concerned about the slowdown in the bank’s trading revenues. Owing to this concern, I recommend investors stay away from Goldman Sachs. 

This article was originally published as Stay Away From Goldman Sachs Despite Earnings Beaton Fool.com

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