US bank Goldman Sachs posts $3.44 bln profit NEW YORK (AFP) - - US banking giant Goldman Sachs on Tuesday posted a net profit of 3.44 billion dollars in the second quarter, widely topping market expectations for profit and revenue. ADVERTISEMENT Revenues amounted to 13.76 billion dollars in the second quarter, the Wall Street company said. "While markets remain fragile and we recognize the challenges the broader economy faces, our second-quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise," Lloyd Blankfein, Goldman's chairman and chief executive, said in a statement Her first buy report? Stright on the mark.
There are two clear takeaways from the analyst reaction to Goldmanâs blow-out second-quarter results on Tuesday. Firstly, while the results were pretty impressive, thereâs a lot of uncertainty about where future profits will be coming from. Secondly, thereâs some concern about the bank holding onto excess capital that (shock, horreure) could be deployed for profitable purposes â such as a share buyback. Anyway, hereâs a good round-up of the results and some of the attendant issues from Citi, to start: Excellent Quarter - With a combination of an improving macro environment (including very strong flows due to increased customer risk appetite and improved asset valuations), a continued favorable competitive landscape (leading to continued wide bid/ask spreads and likely market share gains) plus the likely benefit from being well positioned on prop side, Goldman produced a stellar quarter with strength across all its key businesses resulting in an exceptional 2Q ROE of 24% (ex $426 mil TARP charge). * Diversified Franchise - While 2Q results were strong, they also raise the question where will future growth come from, since it seems clear that core FICC results ($7.8 billion) and equity trading ($2.2 billion) are not sustainable. Part of the reason to own GS is the proven ability of this mgmt team to identify and allocate capital to opportunities in the market, with an overlay of strong risk mgmt oversight. While the future is unknown, the key future growth drivers we are modeling are: 1) opportunities in distressed investments where we see GS as uniquely positioned, 2) reduced drag from writedowns on high risk assets, 3) improved investment banking (led by M&A), and 4) redeployment of excess liquidity/capital. * Strong Balance Sheet - GS has 13.8% Tier 1 ratio implying ability to repurchase up to 90 mil shares today (assuming 10.5% Tier 1 target) or 17% of outstanding shares. Also, the global core excess liquidity position of $171 bil is higher than normal, which gives it significant balance sheet flexibility (note we estimate annual cost of excess liquidity is at least $1.5 billion, or $1.75/sh). * Reiterate Buy - We raise 2009 estimates from $13.50 to $15.80, raise 2010 from $14.50 to $15.00, and raise 2011 from $17.00 to $19.00. Raising TP to $175 to account for higher estimates. And a mention of possible overcapitalisation from Merrill Lynch: â09E to $19.21 from $16.30; â10E to $20.83 from $19.78 GS reported 2Q EPS of $4.93 vs. our forecast of $3.90 and cons. $3.54 on very strong Trading results. Accordingly, we are raising our â09E to reflect the beat in 2Q as well as much better Trading results in 2H. We are also raising our 2010 forecast to $20.83 from $19.78 to reflect a better Trading ROA offset somewhat by lower Assets (driven by the lower 2Q09 base). 23% ROE bodes well for val., Raising PO to $180 from $175 ROE 23%, annualized; ex-impact of TARP charge, it was nearly 24%; our est. was 16%. This bodes well for valuation, since ROE over 20% eventually drives P/B near 2x, vs. current P/B of just 1.4x. BV per share was $106, ahead of our $104 estimate because of higher EPS. Higher BV forecast drives PO to $180. Evidence of wide trading spreads, comp leverage visible In FICC, Credit and FX were strong vs. 1Q, with Commodities and Rates flattish. âTrading ROAâ, our proprietary measure of spread revenue based on trading revenues and total balance-sheet assets, was 4.6% annualized, versus a longterm historical range of 2.0%-3.0% and a 1Q result of 3.9%. Clearly concerns over sustainability were somewhat premature. Also contributing to the âbeatâ were expenses, with comp ratio dropping from 50% in 1Q to 48%. Still, the EPS would have been $5.43 excl TARP with a 50% comp ratio; still well ahead of the $5.00 âwhisperâ number and our $4.60 âTARP-adjustedâ forecast. Is GS too liquid/overcapitalized? Analysts and investors will not fail to note the $170bn in âcore excessâ liquidity and the 12% tier-1 common/ RWA ratio. We estimate redeploying $70bn of liquidity could conservatively add $1 to annual EPS, and expanding assets to drop T-1C/ RWA to a still-hefty 9% could add $2 or more. This said, GS is concerned about the global economy, potential tighter reg. capital requirements, and maintaining dry powder. Given GSâ record, itâs presumptuous to second guess too much. And from Cazenove, who now see limited upside for the bank: European banks - GS results suggest limited upside to estimates (sector - Neutral) Goldman Sachsâ teleconference underlined the cautious outlook from the earnings release (original emails below), with the exception of equity underwriting where management believes there is is the potential for further equity issuance as non-financial companies reduce gearing. In the European banks sector this outlook would principally favour Credit Suisse (CSGN VX CSGN.L; CHF49.3; In-line) and Deutsche Bank (DBK GY DBKGn.DE; â¬46.7; In-line). Our estimates for Barclays (BARC LN BARC.L; 300p, In-line) appear materially consistent with GSâ performance in Q2, eg. we assume an 18% fall Q2/Q1 in underlying revenues at Barclays Capital (we estimate underlying GS FICC revenues declined 8% sequentially) and then a 20% fall H2/H1 to reflect seasonality and slightly less favourable market conditions. Similarly, for RBS (RBS LN RBS.L; 37p; Outperform) Global Banking & Markets we expect a 20% fall in underlying revenues Q2/Q1 and then a 27% decline H2/H1, in part to reflect the strategy to shrink the business. More generally, the quality of earnings reported by GS is arguably undermined by the significant contribution from trading, in particular in equities and with a stronger performance in derivatives versus cash. Notwithstanding managementâs comments about equity underwriting opportunities, the majority of GSâ revenues are generated in areas that are inherently difficult to predict. Further, the stock trades on 1.5x NTAV and in Q2, with record results in FICC and equities, we estimate it generated an annualised RoTE of 23%. The prospect of lower returns in future, as revenues decline from record levels, would appear to limit the scope for a re-rating. We believe a similar outlook for European peers, together with the prospect of higher capital requirements, will constrain valuations for the time being. Key points from teleconference: - Changes in fair value of own debt resulted in a loss of $300m (Q1: $200m loss). - Management has a cautious outlook - âWe are not out of the woods, the world is still a tough place, we are going to be conservativeâ and - despite GS being a buyer of assets, âthere have not been a lot of sellersâ¦at prices that we deem attractiveâ. - The current level of capital and liquidity reflect the potential for further market disruptions as well as the opportunity to capitalise on distressed opportunities. In our view, the former point is more relevant given the $7bn (4%) increase in core liquidity during the quarter. Also, management is understandably cautious about deploying capital/liquidity given the prospect for new regulatory rules in the near future. - Bid-offer spreads in FICC and equities were âflattishâ compared with Q1. Despite a 4% fall in total assets, the âvelocity of assets was quite highâ, reinforcing the point that trading was a key component of Q2 revenues. - âVirtually noneâ of the credit trading performance was based on tighter credit spreads or inventory mark-up. - Bid-offer spreads will narrow as risk capital returns to the market. GS expects other revenue lines to recover to compensate, but M&A revenues (for example) are not expected to recover until 2010. In contrast, KBW think the stock is not overpriced: GS: An Uncanny Ability to Execute: Raise GS to Outperform Eventâ GS 2Q ROCK [$4.93, $4.93, $3.55, $3.53]. Ex. the one-time TARP dividend, EPS was closer to $5.71. Overall, GS beat already elevated expectations driven by record results from FICC and equities trading. While we concede that trading results are not likely sustainable, we believe the stock is inexpensive given our ROE forecast. Increase estimates and price target. Raise rating to Outperform. While UBS think there was more going on than just fixed income, currencies and commodities: * GS reported EPS of $4.93 vs. our/Street estimates of $3.32/$3.54 Strong quarter (even vs. raised expectations) & it clearly wasnât all FICC. While total revs were up a whopping 46% from a strong 1Q, 2Q included $1.2 bn in real estate write-downs, a FAS 159 reversal & a $426 mm TARP repayment hit. Rev drivers were record FICC trading (expected), but also record equity trading and underwriting as GS enjoyed huge client flows, wide spreads and high volatility. * Positives in the quarter 1) Total revs +46% seq with broad strength; 2) Record FICC revs despite $700 mm CRE hit and FAS 159 reversal; 3) Equity revs +59% q/q; 4) Record equity underwriting; 4) 23% ROE & book value +8% seq; 5) Gross leverage at a reasonable 14.2x; 6) Average liquidity pool +4% seq; 7) Basel I Tier 1 ratio a healthy 13.8%, TCE/RWA a strong 12.4%; 8) YTD comp accrual above 1H2007 levels so plenty of flexibility in the second half of 2009. * Issues in the quarter (there werenât many) 1) $700 mm CRE hit and $499 mm mark down in real estate principal investments; 2) M&A advisory revenues -30% seq and -54% y/y as the deal backdrop remains challenging; 3) Securities services revs -38% y/y (but up 22% seq) as the prime brokerage business is not what it used to be (not just a Goldman thing); 4) Asset mgmt revs -3% q/q on lower management and incentive fees. *Valuation: Buy rating Our estimates & price target (based on 1.5x our forward book est) remain unchanged, but weâll follow up after the 11am ET call (888-281-7154; Intl 706- 679-5627). http://ftalphaville.ft.com/blog/2009/07/15/62111/goldmans-blow-out-q2-the-analysts-react/