The investment bank’s revenue grew 25% while its profits jumped 48% amidst markets finally starting to become more volatile (and dangerous).
The Goldman Sachs logo is pictured on their post as traders work on the floor of the New York Stock Exchange in New York August 4, 2014.
Carlo Allegri / Reuters
Amidst some of the most tumultuous markets in over the year, one of the market's behemoths, Goldman Sachs is reporting its earnings. Although the $2.24 billion it earned in the third quarter and $8.39 billion of revenue it generated were from July through September, volatility in the market returned towards the end of the quarter, helping drive $2.17 worth of revenue in fixed income, commodities, and currenencies trading, up 74% from last year, which the firm dsecribed as "challenging." Amidst historical lows in volatility over the summer, Goldman executives expressed confidence that it would return. They were right.
Analysts surveyed by Bloomberg expected revenue of $7.83 billion, net income of $1.5 billion, and earnings per share of $3.21. With such sizable outperformance, Goldman was able to boost its quarterly dividend from $.55 to $.60.
The better-than-expected performance and higher dividend wasn't enough to cheer investors, the bank's stock is down $3.47 or 1.96% in early trading.
In the third quarter of last year, Goldman's revenue was $6.72 billion, profit was $1.52 billion, and earnings per share was $2.88. While banks across Wall Street saw increases in the revenues generated by their trading business, Goldman's big spike in revenue as well as its 48% jump in profits stand out among its peers.
Banks with large trading operations — Goldman Sachs first among them — had been suffering in the last year thanks to an industry-wide trading slump driven by record low volatility. When volatility is low and prices of assets like stocks and bonds don't move around very much, banks's clients like large asset managers and hedge funds don't trade and one of the industry's most profitable businessess gets starved. For Goldman, fixed income revenue has declined year-over-year in the last four quarters, a trend reversed in the third quarter of this year.
"The combination of improving economic conditions in the U.S. and a strong global franchise continued to drive client activity across our diverse set of businesses," said Lloyd Blankfein, the investment bank's chairman and chief executive officer.
Markets, have gotten increasinly volatile this month but have also been driven down, with sizable declines in America and European stocks recently. Just this week, banks across the board slid in value, especially Wednesday, when Goldman's stock fell .82%, or $1.46, and was down just over 3.5% in the month leading up to Thursday's earnings report.
"While conditions and sentiment can shift quickly, the strength of our transaction backlog indicates our clients' desire to pursue and execute their strategic plans for growth," Blankfein said in a statement.
Goldman also saw massive revenues from the return of big mergers and acquisitions, with advisory revenues of $594 million, up from 40% a year ago, "reflecting an increase in industry-wide completed mergers and acquisitions," the company said.
The bank also profited from a surge in initial public offerings, many of which it lead or co-lead. It had $426 million in revenues from equity underwriting, up 54% from a year ago, while its debt underwriting business generated $444 million, a 5% decline in a year ago.
Up until this year, low-interest rates had encouraged large corporations, especially those with less-than-great bond ratings, to binge on debt, leading to massive fees for big underwriters like Goldman. In the second quarter of this year, Goldman got $195 million more in debt underwriting revenue than equity underwriting, tha gap narrowed to $18 million in the third quarter.
Some analysts have wondered if Goldman's business model and heavy reliance on high-profit trading businesses has been permanently hampered by regulations designed to discourage risky trading by banks. Unlike Citigroup, JPMorgan, or Bank of America, Goldman does not have a consumer bank with credit card and mortgage banking businesses that could provide stable earnings despite a stricter regulatory environment. Also, Goldman, unlike Morgan Stanley, does not have an army of financial advisors serving a large customer base.
Morgan Stanley has almost twice as many assets under management and is trying to get more of its profit mix from that more stable business. Goldman's investment management business had $1.46 in revenue, about 17% of its total revenue in the third quarter, while for Morgan Stanley last quarter, 51% of its revenue come from wealth and investment management. The bank's total assets under supervision rose $8 billion to $1.15 trillion in the quarter.
While Goldman's revenue and profits have been able to beat expectations and even rise, some analysts have worried that the bank is increasingly dependent on its investing and lending division, which makes long term debt and equity investments in companies, hedge funds, private equity funds, and real estate, to drive revenue and profits. Because of new regulations, Goldman has to exit some of these investments over time. Revenue of $1.69 billion in that division this quarter was 20% of its total revenue.
In the second quarter of this year investing and lending was 23% of its revenue and 38% of its profit, making it the most proftiable segment. Its typically in the mid-teens for revenue, although it can jump around depending on how the assets in the division gain value or are sold off.
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