Why Is Goldman (GS) Down 2.9% Since Last Earnings Report?
It has been about a month since the last earnings report for Goldman Sachs (GS). Shares have lost about 2.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Goldman due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Goldman Q2 Earnings Beat, Provisions Up on Coronavirus Scare
Goldman reported second-quarter 2020 earnings per share of $6.26, significantly surpassing the Zacks Consensus Estimate of $3.97. Also, the bottom-line figure compares favorably with the earnings of $5.81 per share recorded in the year-earlier quarter.
With the market volatility flaring up on the rising coronavirus concerns, the bank’s results were aided by higher Fixed Income, Currency and Commodities Client Execution (FICC) revenues during the reported quarter. Also, underwriting business displayed strength. In addition, wealth management and consumer banking business reported an upswing, reflecting rise in deposit balances and credit card loans.
The investment bank, nevertheless, disappointed with the rise in operating expenses and provisions. Additionally, lower financial advisory revenues, due to the decline in industry-wide completed mergers and acquisitions transactions, played spoilsport. Moreover, corporate lending revenues disappointed.
Revenues Climb, Expenses Up
Goldman’s net revenues were up 41% year over year to $13.3 billion in the reported quarter. The revenue figure also beat the Zacks Consensus Estimate of $10.1 billion.
Quarterly revenues, as per business segments, are as follows:
The Investment Banking division generated revenues of $2.7 billion, up 36% year over year. Results suggest higher underwriting revenues (more than doubled year over year), supported by elevated equity and debt underwriting revenues on elevated volumes. Yet, corporate lending reported negative revenues. Further, decreased financial advisory revenues (down 11%) were on the downside due to fall in industry-wide completed mergers and acquisitions transactions.
The Global Markets division recorded revenues of $7.2 billion, up 93% year over year. This upside indicates record net revenues in Fixed Income, Currency and Commodities Client Execution (more than doubled year over year), driven by solid revenues from currencies, credit products, interest rate products and commodities. Also, FICC financing was on the upside.
Furthermore, higher equities revenues (up 46%) were recorded, aided by elevated equities intermediation.
The Consumer and Wealth Management division’s revenues of $1.4 billion came in 9% higher year over year during the June-end quarter. Increased revenues from wealth management (up 7%) and consumer banking (up 19%) resulted in this upsurge.
The Asset Management division recorded revenues of $2.1 billion, down 18% year over year. This decline mainly resulted from lower net revenues in equity investments, partly negated by elevated revenues in lending and debt investments, along with higher incentive and management and other fees.
Asset under supervision were $2.1 billion, up 23.5% year over year.
Total operating expenses flared up 37% year over year to $8.4 billion. Rise in almost all components of expenses resulted in this upside.
Notably, net provisions for litigation and regulatory proceedings of $945 million were recorded as compared with the prior-year quarter’s $66 million.
Provision for credit losses was $1.59 billion in the second quarter, significantly up from the prior-year quarter figure of $214 million due to elevated provisions in wholesale loans as well as consumer loans on more-than-expected deterioration in the economic environment.
Strong Capital Position
Goldman displayed a robust capital position in the reported quarter. As of Jun 30, 2020, the company’s Common Equity Tier 1 ratio was 12.4% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior quarter’s 12.3%.
The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.7% at the end of the April-June quarter, up from the prior-quarter figure of 5.9%.
Return on average common shareholders’ equity, on an annualized basis, was 11.1% in the quarter.
Goldman continued to optimize the digital consumer deposit platforms. Notably, consumer deposits escalated a record $20 billion in the reported quarter to $92 billion.
Goldman initiated its transaction banking business in the U.S. providing deposit-taking, payments, liquidity management, and escrow services. During the quarter, deposits on the platform surged $16 billion to $25 billion.
Outlook
In the second half of 2020, Goldman expects a potential pickup in M&A activity, both from companies coming from a position of strength, as well as those challenged by the environment. Dislocated asset prices are likely to drive those opportunities, as significant amount of private capital will be available for deployment amid macro and political uncertainties.
While the company’s balance sheet is modestly asset sensitive, given the mix of high turnover or floating rate assets, and hedge floating rate liabilities, if interest rates remain stable, management expects NII to gradually expand over time on consumer deposits repricing.
Given the challenging operating environment, management is re-examining all its forward spending and investment plans to ensure the best use of resources. Consistent with the historical focus on expense discipline and the emphasis on cost control at Investor Day, management will assess the timing, magnitude and pace of certain expenses and investments. Importantly, it continues to pursue medium-term efficiency target. To that end, management expects to realize the effect of planned reductions in non-compensation expenses more significantly through the second half of this year.
For the next few years, Goldman expects tax rate to be 21%.
Medium-Term Financial Targets
Return on Equity is expected to be greater than 13%, while return on tangible equity to be more than 14%. Efficiency ratio is expected to be around 60%. CET1 ratio is expected in the range of 13-13.5%.
Growing and spending business growth worth $2-$3 billion. New initiatives spend worth $1-2 billion. Funding optimization is expected to be $1 billion. Expense efficiency savings expected to be $1.3 billion.
Management expects transaction banking revenues worth $1 billion and deposits worth $50 billion in more than five years horizon.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 6.31% due to these changes.
VGM Scores
At this time, Goldman has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Goldman has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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