Goldman Sachs (GS) beat earnings this morning, but the report has left investors wondering whether Goldman can ever return to its former glory.
Reuters A day after Bank of America (BAC) beat earnings and two days after JPMorgan Chase’s (JPM) own beat, Goldman Sachs announced that it earned $4.60, beating analyst forecasts for $4.22. SunTrust Robinson Humphrey’s Eric Wasserstrom explains how Goldman Sachs beat its earnings:
Results were driven by strong Investment Banking and Investing & Lending revenues and lower than forecast compensation expense, offsetting slightly higher non-compensation expense…
Investment Banking results reflected strong underwriting and advisory revenues, while net revenues in Investing & Lending were 40% higher vs. 3Q13 due to realized and unrealized gains across the portfolio…
We remain Neutral on GS, but an improving macro-outlook, particularly in the U.S. and Europe, would likely indicate a stronger revenue and profitability trajectory.
About those compensation costs: The percentage of revenue Goldman pays its employees fell to the second-lowest level since it went public, according to Bloomberg, and even its CEO recognizes that it can’t be the driver of future earnings. Bloomberg reports:
Chief Executive Officer Lloyd C. Blankfein, 59, allocated 37 percent of revenue for pay in 2013, compared with 38 percent the previous year. While the average ratio has dropped by more than 6 percentage points since 2008, compared with the five years before the financial crisis, Blankfein has said he's wary of cutting too much and losing top performers…
Goldman Sachs disbursed about 36 percent of revenue as compensation in 2009, the lowest ever as a public company.
Standard Life Investment’s Euan Sanderson calls the results “respectable but unspectacular.” He writes:
Goldman Sachs reported Q4 earnings that exceeded consensus expectations delivering EPS of $4.60 compared to $4.18 expected, producing a 12.7% ROE capping of a year that can be best described as respectable but unspectacular. Full year ROE was 11% which represents a fairly solid showing in a somewhat challenging environment but also serves as a reminder that the glory days of posting 20%+ ROE is a distant memory as higher capital levels and regulatory constraints make it more challenging for 'Goldman to be Goldman'!
Shares of Goldman Sachs dropped 2% to $175.17 today, while Bank of America dipped 0.4% to $17.08 and JPMorgan fell 0.8% to $58.99. Citigroup (C), which missed earnings estimates today, has declined 4.4% to $52.60, while Morgan Stanley (MS), which reports tomorrow, closed off0.7% at $32.
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