Following the slump in fixed income trading revenues, The Goldman Sachs Group, Inc.’s (GS) fourth-quarter 2013 earnings per share came in at $4.60, significantly below the year-ago figure of $5.60. However, it surpassed the Zacks Consensus Estimate of $4.14.
Shares of Goldman were in red in the opening trade, indicating that investors are not encouraged with the numbers delevered by Goldman this morning. However, as the market sentiment remained negative as well, the dip in Goldman’s share price could be a consequence. The price reaction during the later part of the trading session will give a fair idea whether Goldman has been able to meet expectations.
Our proven model predicted that Goldman would beat the earnings as it had the right combination of two key ingredients – the Earnings ESP and Zacks Rank. It had a Zacks Rank #3 (Hold) and a positive Earnings ESP.
Lower top-line performance and undisciplined expense management were the negatives for the quarter. However, the company’s robust equity underwriting revenues and steady capital deployment activities were the positives.
Net income applicable to common shareholders in the quarter was $2.2 billion, declining 21% from $2.8 billion recorded in the prior-year quarter.
For the full-year 2013, net income per share of $15.46 was higher than the prior-year’s earnings of $14.13. Earnings were also above the Zacks Consensus Estimate of $15.09 per share.
Performance in Detail
Goldman’s net revenue declined 5% year over year to $8.8 billion in the quarter under review. Revenues were mainly impeded by lower institutional client services revenue. However, revenues outpaced the Zacks Consensus Estimate of $7.8 billion.
For full-year 2013, the company’s reported revenue of $34.2 billion came in line with the prior year but surpassed the Zacks Consensus Estimate of $33.1 billion.
Quarterly revenues, as per business segments, are as follows:
Investment Banking division generated revenues of $1.7 billion, up 22% year over year. Results reflected higher-than-expected financial advisory revenues. Moreover, revenues from the underwriting business (up 26% year over year) were on the upswing, driven by elevated revenues in equity underwriting.
Investment Management division generated revenues of $1.6 billion, up 5% year over year. Results reflected increased management and other fees along with higher transaction revenues, partially offset by reduced incentive fees.
Investing and Lending division booked revenues of $2.1 billion in the quarter, up 4% year over year. Results included net gains of $1.4 billion from investments in equities, net interest income and net gains of $423 million from debt securities and loans coupled with other net revenues of $234 million.
However, Institutional Client Services division recorded revenues of $3.4 billion, down 22% year over year. Results were hindered by lower revenues in Fixed Income, Currency and Commodities Client Execution (FICC), marked by decreased net revenues primarily in mortgages, followed by currencies, credit products along with interest rate products.
A fall in equity trading revenues (down 27% year over year) was recorded, due to lower net revenues in equities client execution and securities services. Though global equity prices rose during the reported quarter, equities operated in an environment where lower levels of volatility were recorded.
Operating expenses ascended 6% to $5.2 billion compared with the prior-year quarter. Expenses increased largely due to elevated compensation and employee benefits expense and higher non-compensation expenses.
Non-compensation expenses were $3.0 billion in the quarter, up 3% year over year, primarily due to higher net provisions for litigation and regulatory proceedings, which were partly mitigated by reduced operating expenses related to consolidated investments. However, decline in insurance reserves reflecting the sale of Americas reinsurance business was a positive.
Evaluation of Capital
Goldman exhibited a strong capital position in the reported quarter. As of Dec 31, 2013, Goldman’s Tier 1 capital ratio and Tier 1 common ratio under Basel I was 16.7% and 14.6% compared with 16.3% and 14.2%, respectively, in the prior quarter, reflecting revised market risk regulatory capital requirements, which became effective on Jan 1, 2013.
Return on average common shareholders’ equity, on an annualized basis, was 12.7% in the reported quarter compared with 8.1% in the prior quarter.
In Oct 2013, Warren Buffett’s Berkshire Hathaway Inc. (BRK.A) (BRK.B) exercised its revised warrant agreement with Goldman for a net share settlement as of Oct 1, 2013. As per the amended agreement, Goldman delivered Berkshire Hathaway the number of shares of common stock, which was equal in value to the difference between the average closing price of Goldman’s common stock over the 10 trading days prior to Oct 1, 2013 and the exercise price of $115 multiplied by 43.5 million shares covered under the warrant.
Specifically, Berkshire Hathaway received 13.1 million shares worth $2.15 billion and became the sixth largest external investor in Goldman with 2.91% stake. Moreover, the revised agreement lowered the dilution for Goldman’s shareholders and Buffett gained without deploying more funds. Further, such a settlement resulted in a 3% decline in both book value per share and tangible book value per share for Goldman.
Including the impact of the warrant exercise, Goldman’s book value per share increased 5% year over year to $152.48, while tangible book value per share rose 7% to $143.11.
Capital Deployment Update
During 2013, Goldman repurchased 39.3 million shares of its common stock at an average price per share of $157.11 and a total cost of $6.17 billion. Notably, during fourth-quarter 2013, the company repurchased 8.5 million shares of its common stock at an average price per share of $164.90 and a total cost of $1.4 billion. Remaining share authorization under Goldman’s existing repurchase program stands at 57.2 million shares.
We expect Goldman to benefit from its well-managed global franchise, strong capital base and recent investments in the near future. However, regulatory issues, including lawsuits and the market volatility remain concerns. Moreover, lower top line and higher expenses remain concerns.
Though there are concerns related to the impact of legal 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).
The fourth-quarter earnings season kick started with Wall Street biggies such as Wells Fargo & Company(WFC) and JPMorgan Chase & Co. (JPM). Wells Fargo achieved the sixteenth consecutive quarter of earnings growth by reporting earnings of $1.00 per share. Results improved from 99 cents earned in the prior quarter and 91 cents in the year-ago quarter. Also, the results beat the Zacks Consensus Estimate by 2 cents.
Moreover, JPMorgan returned to its earnings story in the fourth quarter after covering its legal costs. The banking giant posted with earnings of $1.30 per share, beating the Zacks Consensus Estimate of $1.25. However, earnings deteriorated from the year-ago number of $1.39. The strength of JPMorgan’s legal reserves made a return to positive earnings surprise possible. The company remained in good shape despite resolving the legal issues related to Global RMBS, Gibbs & Bruns and Madoff.