On January 16th, 2019 Goldman Sachs enjoyed the best trading day in decade, on the back of fourth quarter results that far exceeded analyst expectations. These are the first set of results announced under the leadership of new CEO David Solomon.
So, do these record-breaking results suggest that markets are primed for a rebound? Looking deeper into where Goldman made its money, the answer is arguably no, at least in the short term.
Meir Barak, founder of Tradenet, points out “Goldman is the world’s leading bank. I am not yet sure their fantastic earnings results already indicate that the market is healthy again. It could take more time, as often banks go green a few months before the market follows.”
Goldman Beats EPS & Revenue Forecasts
Goldman surpassed analyst expectations for both earnings per share (EPS) and revenue. An analyst survey by Refinitiv had put estimated EPS at $4.45. Goldman handily beat this delivering $6.04 in earnings per share. Estimates for revenue for the fourth quarter had been pegged at $7.55 billion, but the bank brought in $8.80 billion.
Goldman was well rewarded for beating the streets forecast. The bank’s shares rose 9.54% on the 16th January. This is the biggest one-day gain since 2009.
Analysts cautious estimates were likely based on what has been viewed as an unfavourable business environment. With the S&P 500 down sharply over the same quarter, it was perhaps surprising to see that Goldman was able to deliver such outstanding results. Barak adds: “no doubt the new CEO at Goldman was very happy this mid-January. Would be more cautious on the run-down to April’s next quarterly announcements.”
Looking at the breakdown of revenue sources sheds light on the issue. Those stellar results were obtained largely despite negative market conditions.
Investment Banking – Analysts had estimated Goldmans revenues from investment banking at $1.88 billion. The bank trounced this by about $160 million bringing in$2.04 billion. The standout performer here is Goldman’s financial advisory business. Goldman is the Street’s go-to-guys when it comes to advising on mergers and acquisitions. The bank states that it was able to complete more deals in the fourth quarter helping the strong result. In total revenues from financial advisory was 5% up from the same quarter in 2017.
It wasn’t all good news for Goldman’s investment banking arm, though. Revenue from underwriting was $843 million. This is 38% lower than in the fourth quarter of 2017. This was attributed to a drop in leveraged equity finance and secondary equity offerings.
Investing and Lending – Investing and Lending delivered $1.91 billion in revenue. This was 6% lower than the previous quarter, but still significantly higher than analysts’ expectations of $1.35 billion. Revenues from equity securities come in at $994 million. Given the overall drop in global equities it is perhaps no surprise that this was 18% lower for the fourth quarter of 2017.
The surprisingly positive figure can be attributed to two factors. The first was $1.26 billion in revenue from investment in private equities. This largely consisted of the sale of private companies and the performance of companies in Goldman’s portfolios.
Revenues from debt securities and loans were also up 24% over 2017 at $912 million. Goldman attributes this to higher net interest income.
Client Services – Institutional client services were $2.43 billion in the fourth quarter of 2018. While this was 2% higher than the first quarter of 2017, it was a 22% drop over the previous quarter in 2018. Wider credit spreads in the 4th quarter was a major drag on revenues for credit and interest rate products.
1MDB Scandal Tinges Record Result
Record busting trading day aside, it is not all blue skys for the New York based bank. Legal problems from the 1MDB scandal don’t look to be going away any time soon. CEO David Solomon began the start of his conference call to discuss the fourth quarter earnings by apologizing to the Malaysian people for his bank’s involvement in the billion dollar fraud case.
Ex-Goldman Sachs partner Tim Leissner has been identified as a key player in the scandal. The bank helped Malaysia to raise $6.5 billion for the 1MDB fund. It was later revealed that more than $4.5 billion was pillaged by shadowy financier Jho Taek Low. The fraudster spent the ill gotten gains on a lavish lifestyle including yachts, parties, artworks and backing the Hollywood blockbuster “The Wolf of Wall Street”.
Goldman’s position is that both Leissner and Malaysian government officials stated that there weren’t any intermediaries, including Jho Low, involved. That claim has been met with skepticism from some quarters. Since beginning his tenure as CEO, Solomon has had to repeatedly defend the bank for its role. To cover their legal exposure Goldman increased their provisions for litigation proceedings to $516 million.
The fallout from the 1MDB will continue to be a legal and public relations headache for the foreseeable future. But, as the fourth quarter results and the stock price boost show, it is unlikely to be a crippling one.
The Next Stops
However involved and possibly complicit Goldman has been to with the 1MDB scandal, it seems it will power through anyhow. Often referred to as “Government-Sachs” on Wall-Street, the world’s leading investment bank remains somewhat untouchable.
Again, Goldman Sachs has proven that it is highly resilient, even in the face of legal troubles and plunging markets.
However for the rest of the markets, the fact that Goldman Sachs continues to find new ways to turn a buck and boost their stock price, doesn’t necessarily mean that other companies will follow suit.
Meir Barak concludes: “If there are still some ‘untouchables’ on Wall-Street, Goldman Sachs is probably one of them. Between sub-prime, CDOs, CDSs a decade ago, to1MDB today, Goldman find their way to get away with it”
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