Goldman Sachs (NYSE:GS) recently reported its first-quarter earnings, and the company posted impressive results in almost every category of its business. In case you missed Goldman's post-earnings conference call, here are five things CFO Harvey Schwartz had to say about the company's results and its future growth potential.
The changes of the past few years are really paying off
In Schwartz's opening remarks, he said the quarter's performance reflected Goldman's efforts to adjust its business to the changing market environment. Among the changes he cited were:
- Goldman sold several businesses to adapt to regulatory implications.
- Goldman improved its risk-based capital.
- Goldman revamped its capital allocation processes, which improved efficiency.
- Goldman put a lot of effort into reducing its operating costs.
The numbers tend to back up Schwartz' claims. Goldman's revenue increased by 14% year over year, but its expenses only climbed by 6%. Excluding compensation, expenses actually decreased year over year. So, Goldman is bringing in more money, and it is costing the company less to generate revenue, which translates into higher profits.
The first-quarter results are sustainable
One analyst on Goldman's conference call questioned the sustainability of the company's strong results, noting the investment banking backlog had declined slightly since the end of 2014.
However, Schwartz pointed out that because the company announced $1 trillion in transactions at the end of year, it's only natural that some of that would go through and reduce the backlog a bit. Even though the investment banking backlog decreased, the equity and debt underwriting backlogs increased. Also, the investment banking backlog is still higher than at this time last year.
Schwartz also said corporate confidence is very high, and there is a significant level of activity that should continue to benefit Goldman's bottom line.
ROE is good, but not good enough yet
Even though Goldman produced a return on equity, or ROE, of 14.7%, it has even higher aspirations. The number handily beat last year's ROE of 11.2%, and Goldman considers it to be solid performance, but the company isn't quoting a specific ROE target. It sounds like the best answer to the question "How much ROE does Goldman Sachs want to produce for its shareholders?" is simply "more."
Europe's QE could help Goldman's bottom line
When asked about how Europe's quantitative easing efforts could play into the second quarter's results, Schwartz seemed optimistic. He said QE was a big driver of confidence in Europe, and is a substantial area of focus for Goldman's clients. It remains to be seen just how much of a lasting effect it will have, but Goldman seems bullish on Europe's commitment to QE, and it could have a serious impact on the bank's second-quarter results.
Strong M&A activity could be on the way in the energy sector
Obviously, the energy sector is on the minds of many analysts, particularly in regards to companies that could benefit (or get hurt) from the activity in the sector. With the recent collapse in oil prices, you might think we'd see an increase in activity from energy companies, both in terms of borrowing and mergers and acquisitions.
Schwartz confirmed that activity has indeed been extremely high over the past few quarters, but also said it could take time for the industry to fully adjust to these rapidly changing market conditions. Without mentioning any specifics, he confirmed that the level of dialogue regarding merger transactions and capital actions is quite high. Goldman's business could definitely benefit in multiple ways from the potential future activity in the sector.
Strong results all around
One final thought from Schwartz is that the first-quarter results were driven by strong client activity across the businesses, a point he repeated several times throughout the conference call. In a nutshell, things are looking good at Goldman, and the strong performance is a result of what the company does best -- meeting its clients' investment banking needs.