A $1.7bn profit, $4.7bn set aside for salaries and bonuses and a $5bn equity offering to free itself from the Tarp, here’s some reaction to Monday’s surprisingly strong first quarter results from Goldman Sachs.
Citigroup says the figures blew away expectations (Q1 EPS came in at $3.39 vs. an estimate of $1.59) thanks to a strong performance from the Fixed Income, Currency and Commodities division.
It also makes the point that if Goldman is able to pay off its $10bn of Tarp funds – $5bn from the capital raise and the rest from other unspecified resources – it will be in a very strong competitive position.
Goldman Sachs delivered a positive surprise, preannouncing that its Q1 2009 earnings rose 20% year over year to $1.8 billion (or roughly double consensus estimates)
Earnings power and resilience — These results, which surpassed our expectations, demonstrate Goldman Sachs’ earnings power and resilience, in our opinion. If Goldman Sachs is allowed to repay its TARP funds, as we expect, that step would give Goldman Sachs a competitive advantage over some of its peers, we believe.
Fixed Income, Currency and Commodities (FICC) was the key driver in the earnings surprise. The division’s revenues swung $10 billion qoq, to $6.6 billion from a negative $3.4 billion. The FICC performance could be an outlier, in our opinion, because over the last three years the previous high point for the division was $5 billion. Still, the strong performance in Q1 09 indicates to us that Goldman Sachs has put most of its “legacy” trading assets issues behind it.
But notes that other divisions did not perform as well.
Revenues fell 20-30% year over year in all other major business lines,such as equity trading, investment banking, asset management and securities services (prime brokerage). These revenues declines were in line with our expectations, given the generally depressed levels of investment banking activity, declines in asset values and reductions in leverage for prime brokerage customers.
This point is also picked up by HSBC.
Powerful, and yet to be fully explained, fixed income earnings offset sagging results just about everywhere else, producing an overall result that was twice as good as the consensus estimate.
… which is looking for clarification in Tuesday’s conference call.
But the results are likely to solidify in investors’ minds (and probably those of regulators and policymakers as well) the notion that GS is truly different from other markets-oriented banks. Is it justified? That may hinge on how much the company discloses about how it made all of that money in FICC. As of now (the management conference call is Tuesday at 7:00 am EST), all we know is what is in the press release, that there was “particularly strong performance” in rates, commodities and credit. With that said, the rest of the disclosure spoke to things that did not work as well. Currencies were “solid,” but not as strong as a year ago. Illiquid assets generally lost value, impacting credit and mortgages, the latter to the tune of USD800mn. That means something else contributed extraordinarily to the bottom line.
Merrill Lynch says Goldman benefited from the disarray among its competitors and notes its generous compensation accrual.
FICC (mainly rates, FX, and Commodities) was clearly the driver of the results, FICC revenues were $6.6bn more than double the 1Q08 result and rebounding from negative $3.4bn in 4Q. Equity commissions and Private Equity both underperformed our forecasts (by over $0.25/share each), and an Investment Banking shortfall added another -$0.10 negative variance. The firm’s generous 50% compensation accrual (vs. our expected 48%) also subtracted -$0.20 relative to our forecast. Thus virtually all the surprise and then some came from FICC.
The company has alluded to a favorable widening of bid/offer spreads on customer flow business as many competitors failed, merged, withdrew, or scaled back; these results would appear to testify at least partially to that. Our “Trading ROA” measure reached an estimated 3.56% in the quarter, vs. our forecast of 2.25% and a previous high of 3.44%, recorded in 3Q07.
However, it tells clients not forget about December, which because of a quirk in Goldman’s reporting schedule did not have to be included in the first quarter figures.
December loss suggests net of $1.24 for 4-month period Though the results were excellent, indicating ROE around 14%, the month of December produced a loss of ($2.15). For the 4 months, then, EPS was about $1.24, implying ROE of under 4%. Understandably, investors will focus on the more recent period.
Barclays Capital reckons the decision to repay the Tarp money is a bullish signal.
We view the equity offering as a bullish sign, particularly the company’s plans to use the proceeds to repay TARP. We find it interesting that the size of the offering (including the greenshoe) is some $4bn less than the outstanding TARP balance. We assume that the firm plans to use retained earnings to fund the difference.
But asks whether it will be allowed by US regulators.
We sense that the company is waging a PR campaign to pressure regulators (principally its new regulator, the Fed) to allow repayment.We still wonder why the Fed would allow repayment by a major financial institution at this point without the entire payment coming from private proceeds. We know Congress has made such a provision, but we would think the Fed would still see most of the reasons for large financial institutions having received TARP as still existing.
Notably, neither GS nor any other financial institution has demonstrated an ability to access the unsecured debt financing markets in size at a reasonable cost without government guarantees.
Without the myriad of guarantees around short-term financing, it is not clear to us that the liquidity positions of firms would be in the clear. We also are concerned about the potential for broader market instability that could result from repayment if the market begins to more aggressively separate the “haves” from the “have-nots.”
We assume the firm has some indication from regulators that it will be allowed to repay TARP by making such a public statement, so we look forward to the rationale that the Fed will provide for accepting the repayment. Nevertheless, we expect GS’s equity transaction to price tomorrow morning after the earnings call and prior to the market open.
Meanwhile, Cazenove looks at the read-across to the UK banking sector and says that Barclays will benefit most from the more favourable trading conditions.
(Following the acquisition of Lehman Brothers (US), BarCap is one of the biggest players in the US Treasury market).
Amongst the UK banks, the primary beneficiary of better trading conditions, in our view, is Barclays. In 2008, we estimate Barclays Capital FICC revenues of £4.7bn represented 56% of total Bar Cap income before credit market write-downs and gains on the fair value of own debt.
In a presentation on 31st March, Bob Diamond, Barclays President, referred to significant increases in Q1 client trading volumes at Bar Cap, with currencies +97% YoY and fixed income +65% YoY. Although GS management highlights further credit market write-downs, the “underlying” trading performance is unlikely to be unique, in our view, and our estimate of a 31% decline in underlying Bar Cap profits in 2009E (pre Lehman, credit market write-downs and fair value gains) appears conservative at this early stage in the year. However, while the initial focus will be on GS’ good quarterly earnings, the increase in balance sheet footings illustrates that it is difficult to reduce gross leverage in a strong trading environment.
And in mid morning trading, shares in Barclays are up 28p at 205.25p.
Related links:
Goldman push to repay $10bn – FT.com
On Wells Fargo and banks’ well-being – FT Alphaville
The IBs of March – FT Alphaville
The return of the IB capital call – FT Alphaville