Compared to the other banks, Goldman’s earnings remain a breeze because despite the recent launch of Goldman’s deposit/loan operation, Marcus, a long time will pass before people start caring about its balance sheet and how much the bank makes through net interest margin. Which means the only thing that matters is the income statement, and here things are relatively simple: the company smashed both the top and bottom line, reporting Q2 revenue of $9.40BN, above the consensus expectations of $$8.74BN, and 19.2% higher compared to Q2 2017 if modestly lower than the bumper Q1. EPS of $5.98 was over a dollar higher than the $4.66 consensus estimate, and far above the $3.95 reported one year ago, with the effective tax rate of just 19.4% certainly helping.
Commenting on the result, outgoing CEO Lloyd Blankfein said:
“Solid performance across all of our major businesses drove the strongest first-half returns in nine years. With a healthy economic backdrop and deep client franchises, the firm is well-positioned to invest in attractive opportunities to meet the needs of our clients and continue to generate earnings growth.”
Digging into the various revenue segments, the biggest upside surprise came in FICC, which surged 45% Y/Y to $1.68BN, up from $1.16BN a year ago, and modestly better than the $1.65BN expected. Commenting on the result, Goldman said that “FICC Client Execution operated in an environment characterized by higher client activity and improved market-making conditions compared with a challenging second quarter of 2017, although market-making conditions were generally less favorable compared with the first quarter of 2018.”
Goldman’s Investment banking revenue was also a positive surprise, rising 18.2% to $2.045BN from $1.73BN, and above the $1.84BN expected. This was due to a 7$ increase in financial advisory revenues, which were $804MM, “reflecting an increase in industry-wide completed mergers and acquisitions volumes” as well as a 27% jump in underwriting revenue to $1.24BN, “reflecting significantly higher net revenues from initial public offerings. Net revenues in debt underwriting were slightly higher.” Goldman also siad that the firm’s investment banking transaction backlog “was significantly higher compared with the end of the first quarter of 2018.”
Goldman’s Investing and Lending, i.e., prop, also saw a sharp increase Y/Y, rising 23.4% from $1.58BN to $1.944BN, “reflecting a significant increase in net gains from private equities, primarily driven by company-specific events, including sales, partially offset by significantly lower net gains from public equities.” As usual there was no comment on the actual prop side of the business as technically, Volcker hasn’t been fully repealed yet.
Meanwhile, the most disappointing aspect of the quarter was Goldman’s equity sales and trading, which actually declined fractionally from last year, printing at $1.891BN, and missing expectations of $1.97BN. The culprit for the disappointing performance? Lack of volatility of course: “during the quarter, Equities operated in an environment generally characterized by lower levels of volatility and less favorable market-making conditions compared with the first quarter of 2018.“
Combined across equity and FICC, this meant that total trading revenue of $3.57BN missed the $3.62BN estimate.
Finally, Investment Management also improved, rising 20.5% to 1.843BN from 1.53BN.
Meanwhile, even as the company reported blockbuster revenues, on the comp side Goldman was surprisingly stingy, with total Q2 compensation expense of $3.47BN, below the $3.58BN expected. And with headcount rising 11% to 38,000, it meant that average comp per employee was unchanged from last quarter, at $339,737.
Finally, as reported yesterday, the company is indeed waving goodbye to Lloyd Blankfein who according to the NYT, will be replaced by David Solomon on October 1.
Goldman Sachs on Tuesday named David M. Solomon as its next chief executive officer, putting a veteran investment banker in charge of a Wall Street giant that faces mounting challenges.
Mr. Solomon’s appointment will end the tenure of Lloyd C. Blankfein, the 63-year-old former gold salesman who has run the firm since 2006 and steered it through the financial crisis. Mr. Blankfein will hand over the chief executive role on Oct. 1 and remain chairman until the end of the year. Mr. Solomon, 56 and currently the bank’s president, will add the chairman title at the beginning of 2019.
Mr. Solomon’s appointment is likely to begin a series of management changes in the upper ranks of the firm, as the new chief executive selects his own lieutenants. He will also have responsibility over a plan introduced last year to increase the bank’s revenue by $5 billion over a three-year period, an effort that some analysts consider overdue.
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The selection of Mr. Solomon marks a cultural change at Goldman Sachs. Mr. Solomon is an investment banker rather than a trader in a culture that has been dominated by trading for much of the past decade. Unlike many of his peers who grew up within Goldman, Mr. Solomon was hired as a partner after a swift rise at Bear Stearns, a rival firm.
Goldman’s stock is slightly lower on the news.