What Drove Goldman Sachs' Decent Second Quarter?

Goldman Sachs beat Citigroup and JPMorgan on the number of growth segments. What were the factors driving second-quarter earnings?

Jul 17, 2014 at 1:14PM
Goldman Sachs

Source: Ludovic Bertron

Goldman Sachs (NYSE:GS) closed Tuesday up nearly 1.4% following a premarket second-quarter report. JPMorgan, Citigroup, and Goldman reported earnings in close succession, providing an easy way to compare performances. Why was Goldman Sachs the standout of the three companies? 

Analysts estimated the second-quarter report would include $8 billion in revenue with $3.07 EPS. Goldman beat both estimates with $9.13 billion and $4.07, respectively. The beat also came with segment results that looked healthier than the competition.  

What were the three key investor takeaways from Goldman Sach's second quarter? 

Strengths: investment banking, lending and management 
Investors had to dig through JPMorgan and Citigroup's second-quarter release to find segments that managed a year-over-year revenue growth. Goldman Sachs had three segments that achieved that feat. 

Investment banking was up 15% to $1.8 billion driven by a double-digit percentage growth in underwriting and a flat performance from the financial advisory arm. The investment and lending segment revenue was up 46% from the prior year's quarter to about $2.1 billion. Private equity sales were the primary contributor to the segment's performance but the exact nature of those sales wasn't disclosed. Investment management revenue was up 8% to $1.4 billion mostly due to higher fees and an increase in managed assets. http://www.goldmansachs.com/media-relations/press-releases/current/pdfs/2014-q2-results.pdf pg. 3, para 2 

Goldman did fall in with the competition when it came to a segment plaguing the industry. 

Weak trading   
JPMorgan, Citigroup, and Goldman Sachs all reported drops in trading due to a combination of client wariness and lower interest rates from the government. Goldman Sachs continued that trend with a reported 10% year-over-year drop in fixed income, currency, and commodity trading to $2.2 billion. Equity trading fell 13% to $1.6 billion. The trading results left the institutional client services segment down 11% overall. 

Citigroup had reported a 26% drop in equity and 12% drop in fixed income. JPMorgan split the difference with a 15% drop in fixed-income trading and a 10% drop in equity trading. Bank of America was the oddball with a 5% fixed-income growth -- though said growth was due to a weak prior year's quarter and somewhat negated with a 14% drop in equity trading.   

Competitor comparison
JPMorgan and Citigroup beat analyst estimates for the second quarter but also showed more segment weakness than Goldman Sachs.

Citigroup's quarter was impaired by a $7 billion U.S. Department of Justice settlement regarding mortgages leading up to the housing crisis. The worst-performing segments were trading and global banking while the "bad bank" arm Citi Holdings provided a rare and needed win.

JPMorgan experienced weakness in trading and mortgages with asset management providing the strong performance. The company also addressed CEO Jamie Dimon's treatable throat cancer as investors worried about a potential successor for the high-profile leader.  

Foolish final thoughts
Goldman Sachs was hit with the industrywide problem of trading losses but had more strong-performing segments than the competition. The remaining concerns are lifting that SLR to provide more of a cushion and the fact that the 46% growth for investment and lending might not prove sustainable.  

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Citigroup and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

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