Goldman Smashes Expectations, Reports Second Highest Revenue In History On Blockbuster FICC Results

If Wells Fargo plunged yesterday due to being one of the few US banks without a trading desk to offset its balance sheet woes, then Goldman was the opposite, and without much of a balance sheet to talk about (its attempts to attract subprime borrowers to its Marcus product have had mixed success), the company reaped all the benefits of the Q2 record refi and trading frenzy with almost none of the downside.

Indeed, as Goldman reported moments ago, the bank smashed both top and bottom line expectations, on the back of blockbuster FICC revenues while overall trading revenues almost doubled in Q2 from a year ago:

  • Revenue of $13.30BN, Exp. $9.75BN and 41% higher than Q2 2019
  • EPS $6.26, nearly double the consensus estimate of $3.78, and above last year's $5.81 Y/Y
  • FICC Sales & Trading Rev $4.24B, Est. $2.64B
  • Assets under management $2.06 trillion, +24% y/y
  • Compensation expenses $4.48 billion, +35% y/y, estimate $3.59 billion
  • Net interest income $944 million, -12% y/y, estimate $1.44 billion

Some more of the quarter's highlights:

Overall Q2 revenues of $13.30 billion, 41% higher than the second quarter of 2019 and 52% higher than the first quarter of  2020, were the firm’s second highest quarterly net revenues.  The  increase  compared with the second quarter of 2019 reflected significantly higher net revenues in  Global  Markets  and  Investment  Banking  and  higher  net  revenues  in  Consumer  &  Wealth Management, partially offset by lower net revenues in Asset Management.

Net  revenues  in  Global  Markets  were  $7.18  billion  for  the  second  quarter  of  2020,  93% higher than the second quarter of 2019 and 39% higher than the first quarter of 2020... just in case it is still unclear just how benefited from the covid crisis and economy shutdowns:

Fixed  Income,  Currency  and  Commodities  (FICC)  generated  quarterly  net  revenues soared a whopping 149% to $4.24  billion,  its  highest  quarterly  performance in nine years, "reflecting continued strong client activity in intermediation and financing."  The surge in FICC revenues reflected significantly higher net revenues across all major businesses, particularly in interest  rate  products, credit products  and  commodities. In  addition, net revenues in  FICC financing were significantly higher, primarily driven by repurchase agreements.

It was the third straight quarter of increases for Goldman's FICC division.

Equities  generated  quarterly  net  revenues  of  $2.94  billion,  its  highest  quarterly  performance  in  eleven  years,  and 46%  higher  than  the  second  quarter  of  2019,  due  to  significantly  higher  net  revenues  in  Equities  intermediation, reflecting  significantly higher net revenues in both cash products and derivatives, partially offset by  lower  net  revenues  in  Equities  financing,  reflecting  lower  average  customer  balances, tighter spreads and a decrease in dividends.

Investment  Banking  generated  record  quarterly  net  revenues  of  $2.66  billion,  36% higher than the second quarter of 2019 and 22% higher than the first quarter of 2020, including  record  quarterly  net  revenues  in  both  Equity  and  Debt  underwriting. The increase compared with the second quarter of 2019 reflected significantly  higher net revenues in Underwriting, partially offset by a net loss in Corporate lending and lower net revenues in Financial advisory. Worth noting that in a quarter of record equity issuance...

... Goldman generated $1.06 billion in revenue from equity underwriting, smashing the $632MM expectation. And with debt underwriting also a record, Goldman generated some $990 million here, also smashing the $659 million forecast.

Firmwide assets under supervision, increased $239 billion during the quarter to a record $2.06 trillion; it consisted of net market appreciation of $100 billion, primarily in equity and fixed income assets; Liquidity products net inflows of $133 billion
Long-term net inflows of $6 billion.

Asset-management revenue also swung back to the positive, to the tune of $2.1 billion, after reporting a $96 million hit in the first quarter. Still, that’s down from a year ago on “significantly lower net revenues in equity investments,” partially offset by higher revenue in lending and debt investments.

The bank's prop trading/investment portfolio also benefit from the Q2 rebound after taking a massive markdown in the first three months of the year. Equity and debt holdings swung to a $1.38 billion gain after producing a hit of almost $900 million in the first quarter. Goldman has said it’s moving away from taking stakes with its own money, and is trying to raise more client funds. The strategy could help limit exaggerated moves that add volatility to the firm’s quarterly results.

And while few will care, Goldman was not completely spared from the covid turbulence, with the company reporting that its provision for credit losses soared to $1.59 billion in Q2 2020, up 7x just $214 million for the second quarter of 2019 and up 50% from $937 million in Q1 2020.  Putting the increase in context, Wells Fargo’s provisions went up 19 times while JPMorgan’s was 9 times year-ago provisions.

The  increase  compared  with  the  second  quarter  of  2019  was  primarily  due  to  significantly  higher  provisions  related  to  wholesale  loans  and, consumer  loans,  reflecting  revisions  to  forecasts  of  expected  deterioration  in  the  broader  economic  environment .

Overall, however, the results were solid, and DJ-ing CEO David Solomon was happy:

“This  quarter  demonstrated  the  continued  dedication  of  the  people  of  Goldman  Sachs  to  helping  our  clients  navigate  a  very  challenging  environment,  while  working  remotely  or  returning  to  offices  that  are  quite  different  than the ones we left earlier in the year. We also continue to be grateful for those working hard to contain the pandemic and limit its human and economic costs.  

Our  strong  financial  performance  across  our  client  franchises  demonstrates  the  inherent  benefits  of  our  diversified  business  model.  The  turbulence  we  have  seen  in  recent  months  only  reinforces  our  commitment  to  the  strategy  we  outlined  earlier  this  year  to  investors.  While  the  economic  outlook  remains  uncertain,  I  am  confident that we will continue to be the firm of choice for clients around the world who are looking to reshape their businesses and rebuild a more resilient economy.”

And while the quarter was indeed stellar, Opimas CEO Octavio Marenzi amusingly warned that Goldman’s "almost indecent" earnings may trigger a political backlash,  "The Fed has been able to engineer a huge bounce back in the markets by injecting trillions of dollars, benefiting investment banks primarily. This will lead to calls for the government to do more to help Main Street rather than Wall Street.”

He added that Goldman isn’t unique, as JPMorgan’s and Citigroup’s investment banking arms “also did phenomenally well this quarter,” but he said that those banks "have large retail and commercial banking activities that dragged their results way down, masking the stellar performance of their investment businesses."

Goldman stock surged in kneejerk reaction: