Goldman Sachs Group, Inc. (GS): Three Reasons to Hate the Earnings Report

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Goldman Sachs Group, Inc. (NYSE:GS) has released its first-quarter earnings, and overall, things look pretty good for the famous investment bank. It earned $2.26 billion on $10.09 billion in revenue, exceeding analysts’ expectations. Nevertheless, if you look beyond the top and bottom lines of the earnings release, there are three areas where Goldman investors should expect a little more.

1. Institutional Client Services revenue
Overall, revenue was up just over 1% from the same quarter last year, with three of four business segments improving year over year. However, institutional client services, the bank’s largest segment, declined 10% from the first quarter of 2012.

In the bank’s own words, the first quarter of 2012 was strong, so it could simply be a victim of its own success. Net revenues in interest rate products were significantly lower compared to the first quarter of 2012, and commission and fees were down because of lower market volumes. One positive is that the net loss attributable to the bank’s credit spreads on borrowings declined to $77 million, which was down from $224 million in the same quarter of last year.

Goldman Sachs Group, Inc. (NYSE:GS)2. Tier 1 capital and common ratios
The last potential area of concern is with the bank’s regulatory capital requirements. Both the Tier 1 capital ratio and Tier 1 common ratio were down slightly from the end of 2012, checking in at 14.4% and 12.7%, respectively. This probably was to be expected; Goldman’s so-so performance in the Fed stress tests in March showed that its capital base wasn’t as strong as some other banks. Still, investors should keep an eye on these ratios over the coming year and hope for improvement going forward, lest Goldman need to seek more excess capital down the road.

3. Net interest income
Goldman Sachs Group, Inc. (NYSE:GS) also saw a decline in its net interest income, declining 6% from the first quarter of 2012 and 5% from the fourth quarter. This is not a huge surprise, as banks have been feeling the interest pinch because of the Federal Reserve’s continuing quantitative easing programs. Nevertheless, it is a trend that bears watching going forward, and investors should hope for some stabilization in this important piece of any bank’s business.

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