Goldman Sachs Group Inc (GS)’s Broad Beat to Finish 2012

Goldman Sachs Group, Inc. (NYSE:GS) finished 2012 with a broad based beat on higher debt and equity underwriting and financial advisory revenues also climbed. A similar trend is also visible in the results of JPMorgan Chase & Co. (NYSE:JPM) which reported higher than expected performance for the fourth quarter on higher revenues from debt and equities underwriting revenues. JPM’s revenues from equity and debt underwriting experienced a sequential surge of 13% and 23%, respectively.

Goldman Sachs reported earnings per shares of $5.6, beating estimates of $3.78 per share, on revenues of $9.24 billion. Revenues surpassed the consensus mean estimate by 17%. The remainder of the article aims to unearth the reasons for such an outperformance during the fourth quarter of 2012.

Looking across the results, the beat was fairly broad based: better than expected investment banking, stronger FICC results, more in the way of principal investment gains/realizations and higher investment management revenues all supported by continued strong expense and capital management discipline. 2012 represents the first year of solid growth in core revenues since 2009 with the bank achieving 10% return on equity.

The total net revenue for the fourth quarter was 9.2 billion, up 11% sequentially and 53% above the revenues of the same quarter of the previous year. Much of this improvement in the top line was a result of improvement in investment banking revenues. Basic earnings per share increased two-fold from the linked quarter. A closer look at the bank’s sub-functions reveals a broad based improvement in results.

Revenues of $1.4 billion accruing from were 21% above the results of the linked quarter. Revenues from equity underwriting increased 61% as more constructive equity markets enabled some digestion of backlogs to finish the year. Debt underwriting increased 27% from already healthy levels during the third quarter, while M&A fees were stable and finished the year on a relatively weaker note.

Equities & FICC within the ended the year on a solid note. Revenues of $4.3 billion accruing from Institutional Client Services were 4% up from the linked quarter and 42% from a year. FICC revenues for the fourth quarter of 2012 were $2.1 billion, up 55% year over year, however 14% below the third quarter levels. Similarly, equities revenue of $1.9 billion was up 9% from a year ago but down 12% from the third quarter levels.

The revenue of $2 billion was positively impacted by tighter credit spreads and an increase in equity prices in Asia and Europe. The results from this segment also included a gain of $334 million from the firm’s investment in the share of ICBC.

Revenue of $1.52 billion from was 26% higher than the third quarter of 2012 and 20% above the levels of the fourth quarter of 2011. Assets under supervision during the fourth quarter increased $14 billion to $956 billion, while assets under management decreased $2 billion to $854 billion, partially offset by net market appreciation.

of $4.9 billion were well managed during the fourth quarter, as the total operating expense for 2012 remained unchanged compared with 2011. Non-compensation expense was $2.95 billion. This was 14% higher than the non-compensation expense of the same quarter of 2011 and 24% higher compared to the linked quarter. Compared to the linked quarter, the surge in non-compensation expense was due to higher net provisions for litigation and regulatory proceedings and higher charitable contributions.

Capital Position

During the fourth quarter, the bank’s total assets of $936 billion were down 1% compared to the linked quarter. Risk-weighted assets of $400 billion under Basel I were down 8% over the same time period. The Basel I tier 1 common ratio of 14.5% improved 140 basis points from the linked quarter level. Credit Suisse has an estimate of 9% common ratio under Basel III by the year end.

I believe the trends of higher equity, fixed income underwriting and corporate and investment banking visible in the results for both JPM and GS will positively impact the performance Morgan Stanley (NYSE:MS), which is scheduled to report its fourth quarter performance on Jan. 18.

The article Goldman’s Broad Beat to Finish 2012 originally appeared on Fool.com.

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