Please ensure Javascript is enabled for purposes of website accessibility

Goldman Sachs Earnings: Bank Combats Trading Drop With Private Equity Gain

By John Maxfield - Oct 17, 2017 at 2:27PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Why were shares of the investment bank down after its third-quarter earnings came in well above analysts' expectations?

Going into earnings season, it looked like it would be a bloodbath for Goldman Sachs (GS 5.79%) given the anticipated decline in trading revenues at Wall Street banks in the three months ended Sept. 30. But that didn't turn out to be the case.

When Goldman Sachs reported earnings on Tuesday, its results handily outperformed analysts' expectations. The bank generated $8.3 billion in revenue and $2.1 billion in net income, both of which were 2% higher than the year-ago quarter. It earned $5.02 per share, up from $4.88 in the third quarter of last year. Analysts had expected the bank to earn $4.17 per share.

"Our overall performance this year has been solid and provides a good foundation on which to execute and deliver our growth initiatives," said Lloyd Blankfein, chairman and CEO of Goldman Sachs.

Goldman Sachs former President Gary Cohn standing with current chairman and CEO Lloyd Blankfein.

Goldman Sachs chairman and CEO Lloyd Blankfein (right) standing with the then-president of the investment bank, Gary Cohn. Image source: Goldman Sachs.

The investment bank's trading unit did in fact take a hit. Fixed-income trading, which produces more revenue for the bank than any other individual unit, saw revenue decline 26% on a year-over-year basis. Equities-related sales and trading revenue was 7% lower.

The drop was "due to significantly lower net revenues in commodities, interest rate products and credit products and lower net revenues in currencies," Goldman Sachs explained. The bank characterized the operating environment as "challenging" and "characterized by low levels of volatility and low client activity."

Net revenue in its fixed-income trading unit fell by $512 million, which alone would have amounted to a 6.3% drop from the bank's total revenue in the year-ago quarter.

But the bank was able to make up for the shortfall in other areas. Most of the deficit was covered by a $485 million increase in net revenues in Goldman's investing and lending operations, the vast majority of which stemmed from a gain in equity securities, which rose $471 million.

GS Revenue (TTM) Chart

GS Revenue (TTM) data by YCharts.

The increase in gains from investments in private equities was "positively impacted by corporate performance and company-specific events," the bank said.

Goldman also saw its investment banking segment, which primarily provides advice on mergers and acquisitions and underwrites securities, pick up a lot of slack. Revenue in the unit grew by $260 million, or 17%.

It was the combination of these, in conjunction with a 3% increase in net revenues from its investment management segment, that propelled Goldman's earnings per share so far beyond the consensus estimate going into earnings season.

It also explains why Goldman's shares nevertheless dropped by more than 2% after the better-than-expected results were released. Namely, while the bank was able to record a surge in investment gains, its bread-and-butter trading operations remain mired in a sustained decline.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$302.75 (5.79%) $16.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.