Goldman Sachs Group, Inc. (GS) Looks Set to Get Even Better

Goldman Sachs (NYSE:GS)Goldman Sachs Group, Inc. (NYSE:GS) has had another successful quarter as the company was able to grow both revenue and earnings at the same time. The company’s revenue increased 1% year-over-year, coming in at $10.09 billion. Its operating expense declined 1% year-over-year. The company saw an improvement in net earnings of 7% year-over-year. The company’s results mirrored that of the other banks.

Peers saw similar performance gains

Goldman Sachs Group, Inc. (NYSE:GS) witnessed 12% year-over-year growth in its investment management division. JPMorgan Chase & Co. (NYSE:JPM)Citigroup Inc. (NYSE:C), and Wells Fargo & Company (NYSE:WFC) were all able to report strong results from asset management.

Goldman Sachs Group, Inc. (NYSE:GS) was able to grow earnings through cost-cutting and a slight improvement in revenue. Wells Fargo, JPMorgan Chase, and Citigroup reported either small declines or minor growth in revenue. The low revenue growth environment is here to stay. The big banks have all benefited due to declining loan loss allowances and decreasing litigation related expenses. That being the case, JPMorgan Chase continues to find itself under the cross-fires of a serious mess with regards to the London Whale incident.

JPMorgan Chase & Co. (NYSE:JPM), similar to Goldman Sachs, was able to grow asset management revenue 12%. JPMorgan’s top line growth was rather miserable, but the bottom line saw improvements as higher margin businesses (like asset management, and merchant services) were able to contribute better to the bottom line. JPMorgan Chase & Co. (NYSE:JPM) remains attractive due to a 3.22% dividend yield along with an 8.5 earnings multiple.

Citigroup Inc. (NYSE:C) saw similar gains in fee income, but what hurt the universal banks was the increased tier 1 capital reserve ratio. Citigroup was able to report 213% quarter-over-quarter EPS growth which was driven by a better economy (falling loan loss allowances) along with cost-cutting.

The cost-cutting is likely to continue, which should lead to higher profit margins in future reporting periods. Citigroup Inc. (NYSE:C) trades at a 16.2 multiple to earnings. Analysts anticipate earnings to grow 21% in 2013. The high P/E multiples are justified by the high earnings growth analysts have estimated for the current fiscal year.

Institutional client services a loser due to volatility

Goldman Sachs Group, Inc. (NYSE:GS)’ Institutional Client services division saw a decline in revenue of 10%. The division invests into fixed income, currency, and commodities on behalf of its clients. The 10% decline most likely came from the volatility in the foreign exchange markets, with Japan’s massive stimulus measures, the USD/JPY trade got downright parabolic (2000 pip move in a span of 3-months), the drop in gold prices (GLD has seen new lows for the year as gold prices declined 12% in the month of March).

This couldn’t have helped Goldman Sachs either, not to mention the 500 pip rally in the EUR/USD could have caused jitters among Goldman Sachs’ clients, the market volatility makes it difficult for traders at Goldman Sachs to make a profit on behalf of its clients. The commodities markets have been fairly difficult to trade in, as oil and coal prices have been declining, just take a quick look at KOL, and USO (both price charts are in a sustained down-trend).

Generally speaking, commodities have been a nightmare. Not even the mighty Goldman Sachs could post a profit for its clients. I highly doubt commodity/forex traders will be filing profits for the tax-season, unless they’re extremely talented. Volatility in commodities and foreign exchange is here to stay, with asset rotation leaning heavily towards the stock market.

Investors are finding value in broad-market ETFs like the SPDRs S&P 500 Trust Series ETF, and the Dow Jones Industrial Average ETF (DIA). The market saw a temporary resurgence in the demand for longer-term treasuries, but with the potential risk of the Federal Reserve Bank pulling back its open market operations, the demand for bonds has dropped.

This can be felt just by looking at the iShares Barclays TIPS Bond Fund which saw a modest decline of 2.5% between November and January, before rallying 1.4% from January to March. The volatility in currencies, bonds, and commodities had an awful effect on Goldman Sachs’ Institutional Client Services division, and while I am a hopeful optimist, I genuinely believe that bond, commodity, and currency market volatility is here to stay.

Stock market gains boost investing and lending

On the bright side, Goldman Sachs Group, Inc. (NYSE:GS) was able to see further growth in its investing and lending division. Goldman Sachs saw equity securities contribute 24% revenue growth year-over-year. The investing and lending division was able to grow revenue 8% year-over-year, and it is likely that the stock market will continue to rally.

In fact, stocks seem to be the flavor of the month, as investors have flocked to mutual funds. According to the ICI, mutual fund flows increased by $80.33 billion in January and $42.86 billion in February. Total mutual funds inflows have increased by $122 billion in the first two months of the year, and this trend is likely to continue.

Commodities have been offering awful yields, bond rates are rising, and European stocks show weaker fundamentals due to the whole European economic zone being in a state of recession. The Goldman Sachs investment management division was able to grow revenue 12% in light of the macro-environment, and fund-flows.

Source: Goldman Sachs

The most interesting trend is the sudden improvement in the equity underwriting. The rallying stock market has caused for a sudden influx in the number of IPOs that will be coming onto the market. Total underwriting has increased 69%. This has caused the total investment banking revenue to jump by 36%.

The higher number of underwritings imply that a huge wave of IPOs will be hitting the stock market soon. More IPOs translates into higher trade volume, which could have a positive earnings effect for the Nasdaq OMX Group, NYSE Euronext, along with the CME group.

Expect a ton of Motley Fool updates on the upcoming IPOs as there will be plenty of companies raising capital in the stock market. Hopefully, underwriters will be able to avoid another Facebook Inc (NASDAQ:FB) IPO disaster. That being the case, I anticipate higher rates of underwriting in the foreseeable future.

Companies will attempt to go public in a stock market up-trend because companies are better able to raise capital when investor sentiment is positive. So, expect Goldman Sachs to generate higher revenue from investment banking going forward.

Conclusion and outlook

I remain highly optimistic on Goldman Sachs Group, Inc. (NYSE:GS) going forward. The segment data implies that Goldman Sachs is well-positioned. Despite the volatility in the currencies, bonds, and commodity markets, Goldman Sachs is able to make-up for it with improving results in the investment banking, asset management, and trading division of the company.

The company is well-managed, as Lloyd Blankfein has been able to cut costs aggressively, while maintaining stable revenue growth. The wild-card is the prop-trading desk at the bank, and whether or not it can sustain its positive momentum. The decline in litigation related issues will cause litigation related expenses to decline, and this should boost investor sentiment.

Analysts anticipate Goldman Sachs Group, Inc. (NYSE:GS) to grow earnings 6.91% per year over the next five years. I’m a little more optimistic than that, and while I understand the conservatism analysts have towards the bank, the underpinning performance of Goldman Sachs deserves reconsideration.

Goldman Sachs will be able to sustain higher earnings per share growth through share buy-backs, cost-cutting, and organic revenue growth. The business environment is improving due to the rallying stock market, and fund inflows. It also helps that Goldman Sachs’ trading division has heavy exposure to stocks, which is why the company was able to report such strong earnings.

The article This Mighty Bank Looks Set to Get Even Better originally appeared on Fool.com and is written by Alexander Cho.

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