How Record Revenues Lifted Goldman Sachs Earnings

Banking, finance, and taxes

Published: July 15, 2020 8:34 am

Goldman Sachs Group Inc. (NYSE: GS) reported second-quarter 2020 results before markets opened Wednesday. The investment bank reported diluted earnings per share (EPS) of $6.26 on net revenue of $13.3 billion. In the same period a year ago, the bank reported EPS of $5.81 on revenue of $22.04 billion. Second-quarter results also compare to the consensus estimates for EPS of $3.78 on revenue of $9.73 billion.

The big bank clearly blew away conservative estimates from analysts uncertain of the effect that the COVID-19 pandemic would have on second-quarter results. Net income doubled year over year from $1.21 billion to $2.42 billion.

Goldman reported record net revenue of $2.66 billion in its investment banking segment and a nine-year high in its fixed-income segment of $4.24 billion. The equities segment reported $2.94 billion in revenue, the highest quarterly performance in 11 years.

Fixed-income trading and financing revenues rose by more than 200% year over year reflecting “significantly higher” amounts in interest rate products, credit products and commodities. Repurchase agreements also “significantly” boosted financing revenues.

In its report, Goldman noted that significant declines in the global economy in March and April began turning around in May and June as governments continued to implement monetary easing and to pump stimulus funds into the economy. These actions “contributed to higher global equity prices and tighter credit spreads” compared to the end of the first quarter.

CEO and Chair David Solomon commented that although the economic outlook remains “uncertain,” Goldman is well-positioned to help customers “reshape their businesses and rebuild a more resilient economy.”

The bank added $1.59 billion to its provision for credit losses in the second quarter compared to a boost of $214 million in the year-ago quarter and $937 million in the first quarter. As of June 30, the bank has socked away $4.39 billion to provide for credit losses. Goldman said the increase was due largely to “significantly higher” provisions for wholesale loans.

Book value per common share rose by 4% year over year to $227.311 and annualized return on equity for the quarter came in at 11.1%.

The bank did not offer guidance in its press release, but the consensus estimates call for third-quarter EPS of $3.97 on revenues of $8.34 billion. The EPS estimate for the 2020 fiscal year is $14.41 on revenues of $35.13 billion.

Shares traded up by about 4.0% in the premarket Wednesday to $222.60, having closed on Tuesday at $208.88. The current 52-week range is $130.85 to $250.46. The consensus 12-month price target was $236.08 before results were announced this morning.