Goldman Sachs Beats: Profitability To Increase Once Economy Recovers

Goldman Sachs Group Inc.’s (NYSE:GS) third quarter 2009 (ended Sept. 25, 2009) earnings of $5.25 per share were significantly ahead of the Zacks Consensus Estimate of $4.13.

Results reflected strong performance in the trading operations, which offset the decrease in investment banking division. The company also reported a drop in expenses on a sequential basis.

GAAP net income in the third quarter of 2009 was $3.0 billion or $5.25 per share compared to $2.7 billion or $4.93 per share in the prior quarter (ended June 26, 2009) and $0.8 billion or $1.81 per share in the prior-year quarter (ended Aug. 29, 2009).

Total revenue decreased 10% sequentially, but was more than double from the prior-year period to $12.4 billion. Operating expenses, however, decreased 13% sequentially but were up 49% year-over-year to $7.6 billion. Expenses were down sequentially as a result of lower compensation and benefits spending during the quarter.

At Sept. 25, 2009, Goldman’s Tier 1 capital ratio under Basel  I was 14.5%, up from 13.8% as of Jun 26, 2009. Tier 1 capital ratio under Basel II was almost flat at 16.0% as of Sept. 25, 2009, compared to 16.1% as of June 26, 2009. However, Return on Common Equity (ROE) deteriorated to 21.4% from 23.0% reported in the prior quarter.

Goldman’s book value per share improved 4% to $110.75 compared to $106.41 as of June 26, 2009. Tangible book value per share increased 5% to $101.39 compared to $96.94 as of June 26, 2009. In July, the firm repurchased the warrant issued to the U.S. Treasury pursuant to the Treasury’s TARP Capital Purchase Program for $1.1 billion.

Goldman’s Investment Banking division generated revenue of $899 million, down 38% sequentially and 31% year-over-year. Results reflected decrease in revenue of debt and equity underwriting. Combined with this, revenues were down in Financial advisory business as a result of significant decrease in M&A activity across the industry.

Trading and Principal Investments generated revenue of $10.0 billion, down 7% sequentially but significantly higher than the prior-year quarter. Sequentially results were down as a result of decrease in revenues in fixed income (down 12%) and equity trading (down 14%). However, the Principal investment portfolio showed positive results by reporting revenues of $1.26 billion, up 55% sequentially.

Asset Management and Securities Services generated revenue of $974 million, down 6% sequentially and 29% year-over-year. Though revenues were modest in asset management, the company reported significant drop in securities services revenue.

While assets under management increased $29 billion to $848 billion in the quarter, due to $39 billion of market appreciation, primarily in equity and fixed income assets, it was partially offset by $10 billion of net outflows.

Goldman’s well-diversified business model coupled with a more favorable operating environment led to this strong growth. We think Goldman’s sturdy capital and liquidity will lead to increased profitability from newer opportunities once the economy recovers. We continue to have an Outperform recommendation on the stock.

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