Goldman Smashes Expectations As Trading, Prop Revenues Surge, "Average" Employee Makes $322,607

After the rest of the major US banks posted solid beats, mostly on the back of a strong rebound in markets-driven revenue, there was little concern that Goldman - the pure-play trading powerhouse (at least until the recent launch of a retail lending and deposit operation) would likewise surpass Wall Street's expectations, and moments ago that was confirmed when Goldman reported EPS of $4.88, smashing expectations of $3.86, as profit jumped 47% from a year ago to $2.1 billion. The profit beat was driven by a 19% spike in revenue which rose from $6.9 billion to $8.2 billion, beating consensus estimates of $7.6 billion.

Goldman said its return on equity stood at 11.2% in the third quarter. It was 7% in the year-earlier quarter and hadn’t exceeded 10%—the firm’ theoretical cost of capital—since early 2015.

The main reason for the rebound was a 34% surge in FICC revenue, which jumped from $1.461 billion to $1.784 billion, as well as surge in the firm's prop trading aka "Investing and Lending" revenue, soaring by 109% to $1.398 billion in Q3. A notable outlier on an otherwise pristeen report was the 12% decline in Commissions and Fees, which declined to $719 million, and suggested that traditional methods of generating trading revenue continue to fade.

Also notable is that Investment Banking revenue dipped by 1% to $1.5 billion as a result of the recent scarcity in blockbuster M&A deals.

Some other details from the report:

  • Q3 trading rev. $3.75b vs est. $3.39b (Bloomberg survey of 5 ests.)
  • FICC $1.96b vs est. $1.70b (Bloomberg survey of 5 ests.)
  • Equities $1.78b vs est. $1.69b (Bloomberg survey of 5 ests.)
  • 3Q i-banking $1.54b vs est. $1.47b (Bloomberg survey of 6 ests.)
  • Financial advisory net rev. $658m, down 19% y/y, reflecting decrease in industry-wide completed M&A
  • Underwriting net rev. $879m, up 18% on higher debt underwriting
  • Investment banking transaction backlog increased q/q, was lower y/y

On the expense side, Goldman's compensation benefits accrual for Q3 declined modestly from Q2, but rose 36% from a year earlier to $3.2 billion.

  • Operating expenses $5.3b, 3% lower q/q
  • 3Q compensation expense $3.21b vs $3.33b q/q

The company also reported an effective income tax rate 26.9% for first 9 months vs 26.8% in 1H, and said it had bought back 7.8 million shares during 3Q for total $1.27 billion.

The best news for Goldman employees, however, is that after several quarters of decline, the average employee compensation on an LTM basis rebounded strongly from just under $300k To $322,607, the highest so far in 2016. And also worth a note: after a sharp headcount reduction in Q2 of 2016, the firm's first major culling in years, in Q3 total staff once again posted a modest increase, rising by 100 workers to 34,900.