Big Bank #2 results are out with Goldman reporting Q2 earnings and just like JPM an hour ago, the vampire squire reported solid, if not blowout bottom line earnings, however offset by a modest FICC trading revenue miss.
Here are the Q2 details:
- Net revenue $15.39 billion, up 16% y/y, and once again not only smashing the median estimate of of $12.43 billion but coming above the highest estimate of $13.54 billion.
- EPS $15.02, up quite a few orders of magnitude from the 53 cents reported a year ago, once again beating both the median estimate of $10.15 and the highest Wall Street forecast of $12.02.
Like JPM, Goldman also reported blow out Investment banking revenue of $3.45 billion, +26% y/y, estimate $2.92 billion and strong Equities sales & trading revenue $2.58 billion, down 12% y/y, but beating the estimate $2.53 billion. This however, was offset by a 45% drop in FICC sales and trading, which slid to $2.32BN, below the $2.49BN estimate, and led to a miss in overall trading revenue which came in at $4.90 billion, down -32% y/y, and missing estimates of $5.02 billion.
According to Goldman CEO David Solomon, "Q2 performance and record revenue for the first half of the year demonstrate the strength of client franchise and continued progress on strategic priorities."
Solomon has reason to be happy: As Bloomberg notes, there are a lot of “second-highest” superlatives with these results: the bank reported the second-highest quarterly net revenues (of $15.38 billion), the second-highest quarterly net earnings and the second-highest quarterly diluted EPS.
Also like JPM, Goldman also made progress on trimming its costs last quarter, with operating expenses down 17% Y/Y to $8.64 billion, and down 8% Q/Q. Goldman attributed the decrease to lower non-compensation expenses, particularly lower provisions for litigation and regulatory proceedings. Technology and transaction-based expenses rose.
However, unlike JPM, Goldman took just a $92 million release (compared to a net provision of $1.59 billion for the second quarter of last year), far lower than JPM's $3 billion. Those reserve reductions were on both the wholesale and consumer loan side. There were some provisions related to portfolio growth, which was primarily in credit-card loans.
Some more details from the quarter:
- Headcount Essentially Unchanged Compared With 1Q
- Overall Backlog Increased Significantly vs. Year-End
Digging into the bank's Global Markets division, Goldman reported that Q2 net revenues were $4.90 billion. 32% lower Y/Y and 35% lower than a strong first quarter of 2021.
- Net revenues in FICC were $2.32 billion, 45% lower than the second quarter of 2020, as the prior year period included strong activity levels due to high volatility amid the COVID-19 pandemic.
- According to Goldman, "the decrease in net revenues was due to significantly lower net revenues in FICC intermediation, reflecting significantly lower net revenues in interest rate products, credit products and commodities, and lower net revenues in mortgages and currencies."
- In addition, net revenues in FICC financing were lower, reflecting lower net revenues from repurchase agreements, partially offset by higher net revenues from mortgage lending.
- Net revenues in Equities were $2.58 billion, 12% lower than the second quarter of 2020, due to significantly lower net revenues in Equities intermediation, reflecting significantly lower net revenues in cash products and lower net revenues in derivatives. Net revenues in Equities financing were higher, reflecting higher average client balances.
And here is Goldman breaking down the FICC and Equities net revenues:
So overall a mixed sales and trading picture, but it was more than offset by a blowout quarter for Goldman's investment bankers who had an even better quarter than expected, with total Investment banking revenue up 36% to $3.61 billion, smashing estimates of $2.92 billion, and the second highest in history, just below the SPAC blowout recorded in Q1. The biggest driver was an 83% surge in financial advisory revenue to $1.26 billion (vs exp. of $1.07 billion).
Separately, debt underwriting also came in stronger than expected, with revenue of $950 million, beating analysts’ $817 million estimate. This quarter’s figure is down from a year earlier but up about 8% from the first quarter, a sign debt markets are strengthening as the year progresses. Goldman said the lower revenue this year reflects “significantly lower industry-wide investment-grade volumes, partially offset by elevated industry-wide leveraged finance volumes.”
Here are the details from Goldman:
- The increase in Financial advisory net revenues reflected an increase in completed mergers and acquisitions transactions.
- The increase in Underwriting net revenues was due to higher net revenues in Equity underwriting, primarily driven by strong industry-wide initial public offering activity, partially offset by a significant decline in industry-wide secondary offerings.
- Debt underwriting net revenues were slightly lower, primarily reflecting significantly lower industry-wide investment-grade volumes, partially offset by elevated industry-wide leveraged finance volumes.
- The increase in Corporate lending net revenues primarily reflected higher net interest income.
Perhaps most importantly, the future is bright with Goldman saying that the firm's backlog increased significantly compared with the end of 2020, and was higher compared with the end of the first quarter of 2021. This means even more deals coming in Q3.
Stepping away from Goldman's core trading division, the bank's consumer and wealth management business also had a blowout quarter generating a record net revenue of $1.75 billion in Q2. According to BBG, wealth management was up because of higher assets under supervision and higher loan balances in their private banking and lending operations. Consumer banking was up 41% in net revenues thanks to higher deposit and credit card balances.
Goldman’s equity investments, i.e., prop revenue, surged 302% to $3.717 billion while the incentive fee line jumped 129% to $78 billion, according to Vital Knowledge’s Adam Crisafulli. Despite “blowout headline numbers,” he sees investors taking issue with those lines, “given their volatile and opaque natures (without the huge upside in both those units, the quarter wasn’t as spectacular as the headlines suggest).”
The company provided a breakdown of some of those equity investment: it shows $17 billion of private investments, $4 billion of public. Most are from 2018 through the present, and the bulk are in the Americas, with 26% in Asia and 21% in EMEA.
But the one slide we find most interesting is the one on page 10 which shows that Goldman is officially in distribution mode, selling over $5.5BN in equity investments (mostly to retail clients) while buying just $1.5BN in new positions YTD.
So how are Goldman shares trading after this impressive "second-best ever" quarter in which however FICC could have done better? It appears that the market was expecting just that with GS shares largely unchanged premarket.
Finally, here is Goldman's Q2 earnings presentation (pdf link):