Goldman Sachs (NYSE: GS) Expectations were shattered when he announced his first quarter results last week. The bank posted stellar profits thanks to an improving economy that allowed it – along with many other big banks – to reduce its provisions for credit losses, or the reserves it built up in the midst of the pandemic. last year.
The good quarter strengthened Goldman’s position as a global leader in mergers and acquisitions and equity underwriting, and the strength of the IPO market helped boost its investment banking segment, leading to record profits. While investment banking has led the way, the bank has been strong across all its segments, citing improving economic conditions in the United States and around the world. Here are four things investors have learned from Goldman Sachs’ record period of earnings.
1. The year-over-year growth has been breathtaking
Goldman Sachs posted record quarterly net income of $ 17.7 billion, up 102% from the same period last year. This is explained by strong earnings in all segments.
Investment banking revenues were up 73% from a year ago, bringing in a record $ 3.8 billion thanks to higher revenues from mergers and acquisitions and increased underwriting activity. A warm market for initial public offerings and other fundraising activities has helped the bank record $ 2.6 billion in gains in its private equity book value, further strengthening its leading position in mergers- acquisitions and subscription of shares.
The bank also saw its revenue in global markets climb to $ 7.6 billion, up 73% from a year ago, and its segment’s highest quarterly profits since 2010. Its segment Asset management also posted a record quarter, with $ 4.6 billion in revenue after a loss of $ 96 million. in the same quarter last year.
As a result, Goldman’s first quarter earnings per share (EPS) hit a record $ 18.60. This was an increase of 498% from last year and 54% from the fourth quarter of 2020.
Stellar growth was to be expected given year-over-year comparisons. Indeed, the results for the first quarter of last year reflected the huge reserves of losses recorded by the bank to prepare for the uncertainty of the coronavirus pandemic and its impact on the economy. As these loss provisions are unwound, record profits are recorded across the banking industry.
Regardless, the bank has always blown analysts’ expectations, beating expected EPS by 82% and expected revenue by 41%.
2. Optimistic about the future, with a word of warning
Management has expressed optimism about the future of the economy. CEO David Solomon said there was strong pent-up consumer demand and we should see “very robust economic growth in the second half of 2021 and 2022 as vaccines continue to accelerate.”
The fundamentals of the economy continue to improve, with a drop in the unemployment rate, a pickup in consumer spending and increased confidence in the economic recovery. Because of this, Goldman Sachs was able to free up much of the $ 937 million it had set aside for credit losses, providing a $ 70 million benefit to the income statement.
The bank, however, expressed a warning, saying monetary and fiscal measures taken over the past year presented a growing inflation risk. Solomon said: “There is no doubt that we will see an increase in inflation. The question is how much, how quickly and how we are responding to it.”
Solomon said it was far too early to speculate, but if inflationary pressures accelerated sooner than expected, the bank’s actions would create headwinds for the company. While not a threat in the short term, inflation remains a risk to the markets that the bank is watching closely.
3. Continued expansion in consumer banking services
During the quarter, Goldman launched Marcus Invest, a digital investment offering to consumers with a minimum investment of $ 1,000. The move continues Goldman’s foray into consumer banking and its efforts to create a leading digital consumer banking platform. The bank is also working on the launch of digital verification in the United States
In the first quarter, the company saw its consumer banking revenues increase 32% to $ 371 million on the back of higher credit card loans and growth in deposits.
The push into the consumer banking segment is an effort to reduce Goldman’s reliance on volatile trading and investment bank income, and smooth its profits over time. Bank likely feels growing pressure to strengthen presence in consumer banking segment after competition Morgan stanley acquired E * Trade and Eaton Vance last year.
4. Always at a great price
Goldman already looked cheap, and after its record-breaking first quarter, it looks even cheaper. As of Tuesday’s close, the stock was trading at a price-to-earnings ratio of 8.2 – quite low for the bank in the past 10 years. The bank also has a price-to-book ratio of 1.3, which means its price is slightly higher than the value of its assets.
Goldman Sachs skillfully weathered the pandemic last year, experienced strong growth in several segments, and expects its good results to continue. The second quarter will likely be another period of stellar profits, and year-over-year comparisons are sure to be impressive again given Goldman’s net income bottomed out in the second quarter of last year. . However, the second half of the year is likely to see slower growth rates as the bank braces for inflation expectations and a potentially changing economic environment.
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