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Goldman (GS) Q1 Earnings Beat on Effective Cost Control

The Goldman Sachs Group, Inc.’s GS first-quarter 2016 results recorded a positive earnings surprise of 4.3% on effective cost control. The company reported earnings per share of $2.68, outpacing the Zacks Consensus Estimate of $2.57. However, the bottom line compared unfavorably with the year-ago figure of $5.94.

Shares were in the red in opening trade, indicating the lack of encouragement among investors following the release. The price reaction during the later part of the trading session will give a fair idea about whether Goldman was able to meet expectations.

Effective cost-control measures were a major contributor this quarter. However, lower revenues, weak equity markets and a reduced number of completed merger and acquisitions acted as the headwinds.
 

Performance in Detail

Goldman’s net revenue slumped 40% year over year to $6.3 billion in the quarter under review. Results were mainly impacted by lower non-interest income. Moreover, revenues lagged the Zacks Consensus Estimate of $7.1 billion.

Quarterly revenues, as per business segments, are as follows:

The Investment Banking division generated revenues of $1.5 billion, down 23% year over year. Results reflected lower-than-expected financial advisory revenues, impacted by the decreased number of completed mergers and acquisitions during the quarter. Moreover, revenues from the underwriting business (down 27% year over year) declined, affected by lower revenues in equity underwriting, partially offset by elevated debt underwriting.

The Investment Management division recorded revenues of $1.3 billion, down 15% year over year. Lower transaction, management and incentive revenues affected the results.

The Investing and Lending division booked revenues of $87 million in the quarter, down 95% year over year. Results reflected no revenues from equity investments and reduced revenues from debt securities and loans.

The Institutional Client Services division recorded revenues of $3.4 billion, down 37% year over year. Results were impacted by significantly lower revenues in Fixed Income, Currency and Commodities Client Execution (FICC) (down 47%), marked by a challenging operating environment. Moreover, a decline in equity trading revenues (down 23% year over year) was recorded, mainly due to lower net revenues in equities client execution.

Operating expenses decreased 29% to $4.8 billion from the prior-year quarter. Expenses declined largely due to lower compensation and employee benefits expenses (down 40%) and non-compensation expenses (down 6%).

Non-compensation expenses were $2.1 billion in the quarter, down 6% year over year, primarily due to lower other expenses reflecting reduced net provisions for litigation and regulatory proceedings. However, elevated brokerage, clearing, exchange and distribution fees during the quarter were recorded.

Evaluation of Capital

Goldman exhibited a strong capital position in the reported quarter. As of Mar 31, 2016, the company’s Common Equity Tier 1 ratio was 12.2% under the Basel III Advanced Approach, reflecting the valid transitional provisions. This compared unfavorably with 12.4% as of Dec 31, 2015.

Adjusted return on average common shareholders’ equity, on an annualized basis, was 6.4% in the reported quarter. Goldman’s book value per share of $173.00 and tangible book value per share of $163.54 reflected a 1% increase from the end of 2015.

Capital Deployment Update

During first-quarter 2016, the company repurchased 10.0 million shares of its common stock at an average price per share of $154.44 and at a total cost of $1.55 billion.

Conclusion

Goldman reported a decent quarter. Cost-control measures with reduced legal provisions drove the results for the company. Though there are concerns related to legal issues and the company’s global exposure, equity-centric activities in the U.S. should support results in the upcoming quarters with recovery expected in the capital markets. However, a challenging environment and volatile markets kept investors off the market, which led to the weak revenues. This banking major currently carries a Zacks Rank #4 (Sell).

Performance of Other Major Banks

Banking major JPMorgan Chase & Co. JPM, which kick-started first-quarter 2016 earnings season among the big banks, reported earnings of $1.35 per share surpassing the Zacks Consensus Estimate of $1.26, which was pretty conservative given the number of downward revisions over the last couple of months. However, the figure reflects a 7% decline from the year-ago quarter, indicating the impact of challenging market conditions.

Buoyed by strong top-line growth, Wells Fargo & Company’s WFC first-quarter 2016 earnings recorded a positive surprise of about 1%. Earnings of 99 cents per share beat the Zacks Consensus Estimate by a penny. However, it compared unfavorably with the prior-year quarter’s earnings of $1.04 per share.

A fall in operating expenses drove Citigroup Inc. C to deliver a positive earnings surprise of more than 6% in first-quarter 2016. The company’s earnings from continuing operations per share of $1.11 for the quarter outpaced the Zacks Consensus Estimate of $1.04. However, earnings declined 26% on a year-over-year basis.

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