This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

A Mediocre Earnings Beat for Goldman Sachs

Updated from 8:11 a.m. ET to include CFO comments about Volcker Rule and afternoon share prices.

NEW YORK (TheStreet) -- Goldman Sachs (GS) beat fourth quarter earnings on a recovery in the bank's fixed income sales and trading revenue, growth at its investment bank and higher marks to its near-$60 billion portfolio of alternative assets.

The earnings indicate that Goldman Sachs was able to take advantage of recovering confidence in capital markets and corporate C-Suites. However, they also continued to point to the bank's reliance on earnings from businesses that may become constrained by regulations.

The nation's largest independent investment bank said on Thursday it earned $4.60 in fourth quarter earnings per share on revenue of $8.78 billion, significantly beating Wall Street consensus estimates of $4.18 a share on $7.75 billion in revenue. Credit Suisse and Keefe Bruyette & Woods both forecast Goldman's fourth quarter EPS at $4.40 a share, in January reports.

The firm saw positive trends across its most important businesses in the fourth quarter, including strong performance at its investment bank and slightly better-than-forecast equity and fixed income sales and trading.

Goldman Sachs investment banking unit capitalized on recovering confidence among its corporate clients, helping to drive $1.72 billion in the fourth quarter net revenue, ahead of most estimates, and 47% higher than year-ago levels.

KBW analyst Fred Cannon forecast Goldman to generate $1.72 billion in investment banking revenue on particularly strong equity underwriting and M&A advisory performance. Overall, the unit's $6 billion in sales reflected 22% growth through 2013, the representing the best revenue growth across the firm.

Goldman Sachs CFO Harvey Schwartz attributed strong investment banking results to a robust IPO calendar, higher M&A volumes and continued strength in debt financing.

"It shouldn't be lost on us that the long-term trend is slowly, steadily improving," Schwartz said of corporate activity and the global economic outlook in 2013.

The bank's fixed income, currency and commodity sales and trading division earned $1.72 billion in revenue, slightly beating estimates of $1.7 billion that reflected a strong rise from the third quarter but a 15% drop from year-ago levels.

Equities sales and trading revenue of $1.62 billion also slightly beat consensus estimates, indicating that the bank's trading division performed well in the fourth quarter. 

Total sales and trading revenue at Goldman Sachs of $15.7 billion in 2013, however, represented a 13% year-over-year decline.

Goldman Sachs shares were falling more than 2% to $174.97 in early Thursday trading.

Investing & Lending Drives Operating Profits

As in previous quarters, Goldman's better-than-expected revenue and earnings were largely attributable to its so-called Investing & Lending unit, which houses nearly $60 billion in the bank's alternative investments.

That unit earned in excess of $2 billion in fourth quarter revenue, significantly ahead of consensus of $1.4 billion in revenue. The unit has also been the biggest driver of Goldman's operating profits in 2013.

Unfortunately for Goldman, the implementation of the Volcker Rule could hinder the bank's ability to replicate those Investing & Lending earnings, which generally result from rising values of the bank's pre-crisis private equity and mezzanine credit investments.

The Volcker rule seeks a 3% cap on any bank's investment in private equity and hedge funds relative to its Tier 1 capital, a regulation that would appear to handcuff Goldman Sachs. Of course there will be ways to mitigate the impact of Volcker, nevertheless, Goldman stands out as the bank most affected by the regulation.

Overall, Goldman's Investing & Lending division generated over $7 billion in net revenue, a 19% increase from 2012. The unit was Goldman's second fastest growing business by revenue in 2013.

Volcker Implementation Team

CFO Schwartz said on a conference call with investors that the bank has created a "Volcker implementation team" that will help it adapt to new regulations now that the regulation has been signed into a law.

Schwartz said that the firm is working on figuring out ways to continue investing in private equity structures in a "Volcker compliant manner." He also noted that Goldman may be able to find ways to invest in alternative assets off of its balance sheet.

When pressed by analysts, Schwartz wasn't willing to project the rule impact on the firm's revenues or expenses. "At this stage it is way too early to quantify any impact," he said. 

The Volcker Rule may also not be as harsh as some might have expected. "At this stage, it doesn't look like a revenue impacting item," Schwartz said.

Goldman's Bottom Line

The bank was also able to boost its earnings by lowering its compensation and non-compensation expenses. Compensation and benefits expenses were $12.61 billion for 2013, 3% lower than 2012. Non-compensation expenses were $9.86 billion for 2013, 2% lower than 2012. Goldman did say its expenses for the fourth quarter rose 40% from the third quarter, as it upped its legal reserves.

Goldman Sachs was able to buy back 39.3 million shares of its common stock for a total cost of $6.17 billion in 2013.

Annualized return on equity at Goldman Sachs was 12.7% for the fourth quarter of 2013.

"Our work in advancing our client franchise and in ensuring continued cost discipline has allowed us to provide solid returns even in a somewhat challenging environment," Lloyd C. Blankfein, Goldman Sachs CEO said in a statement.

"We believe that we are well positioned to generate solid returns as the economy continues to heal and provide considerable upside for our shareholders as conditions materially improve."

Credit Suisse analysts said that Goldman's fourth quarter earnings represented a solid end to a year that included rising operating margins and an average return on equity of 11%, even amid a challenging market backdrop.

The analysts reiterated an 'outperform' rating on Goldman Sachs shares and said "the firm should disproportionately benefit as capital markets conditions improve and macro headwinds subside given the firm's best-in-class client franchise positioning."

Here's How to Read Goldman Sachs Earnings
-- Written by Antoine Gara in New York

Stock quotes in this article: GS 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,483.09 -18.56 -0.11%
S&P 500 1,876.11 +0.72 0.04%
NASDAQ 4,139.6220 +12.6550 0.31%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs