Investment banking giant Goldman Sachs (NYSE:GS) recently reported its fourth-quarter and full-year results, and investors were generally unhappy with what they saw. While earnings came in better than expected, and some areas of the business look strong, extremely weak trading revenue and the lack of expected benefit from the tax overhaul are troubling.
Here's a rundown of some of the most important points from Goldman's report. We'll start with the good things.
1. Earnings and profitability were strong
On the bottom line, Goldman had an excellent quarter. Excluding a $4.4 billion charge due to the tax overhaul, Goldman earned $5.68 per share for the fourth quarter – well above analyst expectations of $4.91.
Revenue came in at $7.83 billion, beating the average expectation of $7.61 billion. For the year, Goldman generated a return on equity of 10.8%, above the industry benchmark of 10%.
2. Investment banking is doing well
Goldman's investment banking segment had a strong quarter, and a strong year. The firm had the top market share in announced and completed M&A, as well as in equity and common stock offerings. Investment banking generated revenue of $7.37 billion in 2017, the bank's second-highest annual performance ever.
The fourth quarter was especially strong. Investment banking revenue was up 44% year over year, and underwriting revenue rose a staggering 76%.
3. Marcus had an excellent year
One of Goldman's more recent efforts is its push into consumer banking through its Marcus platform. During 2017, Marcus originated more than $2 billion of loans and took in over $5 billion of net deposits. That's even more impressive considering that the Marcus lending platform launched just over a year ago. If it maintains this pace of growth, it could become a nice revenue stream for Goldman.
4. Massive share buybacks
Goldman Sachs is not a high-paying dividend stock, by any definition of the term. The bank's current payout gives it a yield of just 1.2%.
Instead, Goldman chooses to put more of its money into share buybacks. During 2017, the bank spent more than $6.7 billion on share repurchases and reduced its outstanding share count by 6.2%. It's one of the cheapest big bank stocks relative to its book value, so this could be a major long-term value creator if its trading business rebounds and profits stay strong.
Areas of concern
Unfortunately, there was a fair amount of bad news in Goldman Sachs' earnings report as well, which is why the stock dropped by about 4% on the morning it was released. Here are three areas that I found especially troubling.
1. Investment management net outflows
Goldman's investment management assets under supervision grew by $21 billion during the fourth quarter, which sounds good at first. However, the strong stock market produced an increase of $22 billion in that figure, so Goldman's investment management business actually had net outflows of $1 billion during the quarter. In other words, more client money was leaving than was coming in.
2. Trading revenue was awful
Even before the earnings report was released, it was no secret that Goldman's trading revenue would be bad. The current low-volatility environment is naturally bad for a business that relies on trading volume, so trading is a weak spot across the entire industry.
However, the concerning part is how bad Goldman's trading revenue was. Specifically, Goldman's fixed-income, currency, and commodity (FICC) trading revenue plunged by 50% year over year, far worse than its peers. For comparison, JPMorgan Chase's fixed-income trading revenue dropped by 34%, and Bank of America's FICC trading revenue fell by just 13%.
3. The tax overhaul will benefit Goldman less than expected
On the earnings conference call, Goldman gave investors another negative surprise when management said that the recent tax overhaul wouldn't be as much of a benefit to the bank as some had anticipated. Goldman expects its 2018 effective tax rate to be about 24%, significantly higher than 17% that analysts were hoping for.
Buy the dip?
To be perfectly clear, I still think Goldman is an incredible institution and will deliver excellent returns for long-term investors.
Having said that, there are certainly a few trouble spots to keep an eye on, particularly Goldman's trading business, which is arguably the most important part of its operations. However, if Goldman successfully turns its trading woes around, or if market volatility picks up a bit creating a more favorable trading environment, the current share price could seem like a bargain in a few years' time.