Inside Goldman Sachs’ Results

Monday, after market close, Goldman Sachs Group, Inc. (GS) reported 1Q09 earnings of $1.66 billion or $3.39 a share, up from $1.51 billion, or $3.23 a share a year earlier. The results were way ahead of consensus estimates of a profit of $1.64 per share. A conference call to discuss the results was held this morning.

Higher-than-expected profit was mainly due to strong trading revenue. Of the first quarter net revenues of $9.4 billion, $6.6 billion (34% higher than its previous record) was the contribution from the company’s fixed-income, currency and commodities (FICC) group. High volatility (benefiting the Treasury markets and the Dollar), wide spreads in fixed income and reduced competition in the markets were the main reasons for strong earnings.

However, the areas outside fixed income and currency businesses showed weakness during the quarter. Investment banking revenues were down 30% year-over-year, due to the low activity in the capital markets. Asset management revenues also declined 28% to $949 million.

The results also benefited from the change in the timing of the fiscal year by a month, to match the calendar year, as a result of GS becoming a bank holding company. The company reported December results separately, which were a loss of $1.3 billion.

The bank also announced a $5 billion offering of common shares to the public. The proceeds will be used to repay the $10 billion of capital it received from Treasury under the Troubled Assets Relief Program.

With the positive surprise from Goldman, the market’s focus has now shifted to other big banks like JP Morgan Chase (JPM), Citigroup (C) and Bank of America (BAC), which are scheduled to report their 1Q09 results soon.

We expect the results to benefit from stronger fixed income revenues, lower funding costs, higher mortgage origination business (as seen in Wells Fargo’s preannouncement), as also easing of the mark-to-market accounting rules and AIG (AIG) ayouts (please read Dirk’s blog on increase in the forecasts for financials) but these banks have a much larger retail business than Goldman, and will see higher losses there.

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