If there is anything the recent reports from money center banks showed, it was the the February volatility surge was a gift to bank equity trading desks, which is why Wall Street was eagerly anticipating this morning's Goldman Sachs results to see how much the "cleanest" trading desk on Wall Street would benefit from the turmoil in Q1.
It was not disappointed, because moments ago Lloyd Blankfein, in one of his last quarters as Goldman CEO, reported results that blew expectations out of the water.
Goldman reported net earnings of $2.83 billion, transalating into EPS of $6.95, far above the $5.58 consensus estimate, which however was largely driven by the plunge in the company's tax rate. This was a 15.4% annualized ROE. This is what Goldman said on the matter:
The effective income tax rate for the first quarter of 2018 was 17.2%, down from the full year rate of 61.5% for 2017, as 2017 included the estimated impact of Tax Legislation, which increased the firm’s effective income tax rate by 39.5 percentage points.
So to avoid the noise from the swing in the tax rate, we looked simply at the top line and it was here that Goldman truly shone, reporting total Q1 revenue of $10.04BN, up 25% Y/Y and not only smashing consensus expectations of $8.74BN, but above the highest Wall Street estimate, mostly thanks to equity trading and its prop desk.
Here are the standouts:
- Equities sales & trading revenue $2.31 billion, estimate $1.85 billion, up 38% from $1.67 billion
- Trading revenue $4.39 billion, estimate $3.89 billion, and up 31% from $3.36 billion
- Investing and Lending (Prop) revenue $2.087 billion, up 43% from $1.464 billion
Here is how Goldman's breakdown of its institutional client services revenue:
Net revenues in Institutional Client Services were $4.39 billion for the first quarter of 2018, 31% higher than the first quarter of 2017 and 85% higher than the fourth quarter of 2017.
Net revenues in Fixed Income, Currency and Commodities Client Execution were $2.07 billion, 23% higher than the first quarter of 2017, due to significantly higher net revenues in currencies, commodities and credit products, partially offset by lower net revenues in interest rate products and mortgages. During the quarter, Fixed Income, Currency and Commodities Client Execution operated in an environment characterized by improved market-making conditions and higher client activity compared with the fourth quarter of 2017.
Net revenues in Equities were $2.31 billion, 38% higher than the first quarter of 2017, primarily due to significantly higher net revenues in equities client execution, reflecting significantly higher results in both derivatives and cash products. In addition, commissions and fees were higher, reflecting higher market volumes, and net revenues in securities services were higher, reflecting higher average customer balances. During the quarter, Equities operated in an environment characterized by periods of high volatility and an increase in client activity compared with the fourth quarter of 2017
On the other hand, both investment banking ($1.79 billion, vs est $1.71 billion) and FICC sales & trading ($2.07 billion, est $2.04 billion) failed to make a notable mark, just barely beating estimates, in line with results previously reported by both JPM and BofA.
Here is Goldman's breakdown of its results:
This is how the outlier quarter looked like in context - the best since Q1 2015.
Is the downward slope in Goldman revenue finally over? Perhaps, but we will need to see a sustained increase in vol for that to be the case.
Also notable: Goldman boosted its comp 50 $4.1 billion, or a 41% compensation ratio. The result was an average compensation of $340,000 for the average Goldman employee (of which the company had 37,300 in Q1, an increase of 700 from the previous quarter).
As Goldman notes, "the accrual for compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as benefits) was $4.12 billion for the first quarter of 2018, 25% higher than the first quarter of 2017, reflecting a significant increase in net revenues. The ratio of compensation and benefits to net revenues for the first quarter of 2018 was 41.0%, unchanged compared with the first quarter of 2017. Total staff increased 2% during the first quarter of 2018."
What is odd is that judging by how Goldman stock is trading on the news - i.e. barely higher - not even this blowout quarter may have been enough for the market...