Goldman Sachs (NYSE:GS) is set to report its third-quarter earnings on Oct. 15, and analysts are expecting earnings of $3.41 per share on $7.67 billion in revenue. Goldman is one of the more unpredictable companies in the market when it comes to earnings. Its last two quarterly earnings numbers have surprised the market by an average margin of 44.3%.
Of course, there's more to the story than the top and bottom lines. Here are four things I'll be keeping my eye on when Goldman reports.
What the company's performance really looks like
Goldman's second-quarter earnings looked pretty dismal at first glance, but this was mainly due to mortgage-related litigation and regulatory expenses. In fact, Goldman's legal and regulatory expenses soared to $1.45 billion from just $284 million in the same quarter of 2014.
The impact of these expenses was so big that it made Goldman's respectable 11.5% return on equity (ROE) appear to be a paltry 4.8%. And it made a 1% reduction in non-compensation expense appear to be a 48% increase. However, as you can see below, Goldman's year-over-year performance actually looked pretty impressive.
My point here is to get you to look past the headline numbers and focus on the real story. Numbers like ROE, expense controls, and the performance metrics of individual business segments are much more vital to Goldman Sachs as a long-term investment than whether or not the top- and bottom-line numbers met or missed expectations.
How did investment banking hold up?
In the second quarter, Goldman Sachs' investment banking business produced an excellent quarter, with more than $2 billion in revenue. This makes sense, as investment banking tends to perform well in a strong stock market, and for much of the second quarter of the year, the market was at or near record highs.
However, the market's performance in the last quarter wasn't exactly great, as you can see from this chart of the Dow Jones Industrial Average during the second and third quarters.
When markets are weak, companies aren't as motivated to accept buyout offers from other companies (less M&A activity), and private companies are less likely to launch IPOs. In fact, a recent report from a JPMorgan Chase analyst projects that investment banking fee revenue will decline 17% industrywide when compared to the second quarter.
So, with that in mind, one thing I'm curious to see is how well Goldman's investment banking revenue held up in the turbulent third quarter.
Also tied in to the turbulent third quarter is the performance of Goldman Sachs' investment management business. Naturally, it makes sense that when the market doesn't perform well, the bank's total assets under supervision are likely to decline. As a result, revenue can drop significantly.
However, more important to the bank's long-term success is the amount of net inflows or outflows during the quarter. A net inflow of money implies that investors deposited more money than they withdrew, so the bank is better positioned to make more money in the future. A new outflow shows that investors are pulling their money out faster than new money is coming in.
To illustrate this point, Goldman Sachs' long-term assets under supervision increased by $11 billion during the second quarter. However, the bank actually saw net inflows of an even more impressive $14 billion, which was somewhat distorted by $3 billion in net market depreciation. Market depreciation is likely to be significantly worse in the third quarter, so be sure to pay attention to the overall flow of money.
Any news on Goldman's personal-lending venture
Around the time of last quarter's earnings report, Goldman Sachs announced its intention to enter the consumer lending space and issue loans in the $15,000 to $20,000 range -- a segment of the market the company has never targeted before. To set up its lending platform, Goldman hired Harit Talwar, former head of Discover's U.S. card services.
During the conference call, I'm curious to see whether Goldman has any further details to offer on this venture. As I've said before, the potential market here is huge, and it could mean billions in additional revenue to Goldman if successful.
The bottom line
Goldman Sachs is certainly capable of surprising analysts -- in both the positive and negative senses. However, more important than the top- and bottom-line numbers are the trends affecting Goldman's businesses and profitability, as well as any developments that could lead to profits in the future.