Goldman Sachs beats estimates for third-quarter profit on stronger-than-expected investment banking

Key Points
  • The bank reports $6.28 per share in earnings, exceeding the $5.38 estimate from analysts surveyed by Refinitiv.
  • Revenue of $8.65 billion exceeded the $8.4 billion estimate on better-than-expected results in most divisions apart from trading.
  • Investment banking beat expectations, fueled by initial public offerings in its equities capital markets business. But trading revenue just missed expectations on weakness in interest rate, credit and mortgage trading.
Goldman Sachs beats top and bottom line
Goldman Sachs beats top and bottom line

Goldman Sachs beat analysts' expectations for third-quarter profit on strength in all of its major businesses apart from trading.

The bank on Tuesday reported earnings per share of $6.28, exceeding the $5.38 estimate by analysts surveyed by Refinitiv and higher than the $5.02 a year earlier. Revenue of $8.65 billion exceeded the $8.4 billion estimate on better-than-expected results in the firm's investment banking, investing and lending and investment management divisions.

The company's shares rose 1.3 percent at 10:25 am. The firm advanced along with Morgan Stanley, which also reported that it beat estimates on better-than-expected revenue from investment banking.

Goldman's investment-banking revenue rose 10 percent from a year earlier to $1.98 billion in revenue, exceeding the $1.8 billion estimate, on better-than-expected results in mergers advisory and capital markets underwriting. The business also benefited from strong demand for initial public offerings, which helped offset a decline for debt offerings.

Goldman's results were powered by the firm's "investment banking franchise, where revenues for equities underwriting more than doubled," said Octavio Marenzi, who runs management consultancy Opimas. "The fears that fixed-income revenues would suffer this quarter were met, but the blow was cushioned by higher revenues from FX and commodities trading."

The bank's investing and lending division, sometimes referred to as Goldman's merchant bank because it takes private equity stakes in companies, produced $1.86 billion in revenue, beating the $1.78 billion estimate. The division, which also houses the firm's Marcus consumer lending business, benefited from a 56 percent surge in net interest income to $700 million as the firm extended more credit to retail customers.

Investment management generated $1.7 billion in revenue, edging out the $1.66 billion estimate. Revenue in the division, which contains an asset management business and private wealth management, rose 12 percent from the year earlier on growing fees from management and more assets under supervision.

Results were less rosy in the firm's biggest division, which employs its bond and equities traders. Trading produced $3.1 billion in revenue, just shy of analysts' $3.16 billion estimate, driven by underperformance in the fixed-income business. That unit produced $1.31 billion in revenue, a 10 percent decline from a year earlier that missed expectations by $100 million. Goldman blamed "significantly lower" demand for interest-rate products and lower demand for credit and mortgage trading. Equities trading revenue produced $1.79 billion, 8 percent higher than a year earlier and $60 million above expectations, from stronger demand for derivative trading.

The firm spent $3.09 billion for compensation and benefits for employees in the quarter, just under the $3.15 billion estimate of analysts and 3 percent lower than the year earlier period.

CEO David Solomon officially took control of the bank just as the quarter ended on Oct. 1. Before that, he rearranged the company's top managers, promoting insiders who had spent time with him in investment banking roles. He named John Waldron as the bank's president and chief operating officer and Stephen Scherr the firm's chief financial officer.

"We delivered solid results in the third quarter driven by contributions from across our diversified client franchise," Solomon said in the earnings release. The company's earnings per share for the first nine months of the year were the highest in its history, he added.

Solomon's main challenge is to make good on a plan to boost revenue by $5 billion by broadening its banking and trading client base, finding growth in smaller markets and pushing into retail products like personal loans. Part of that plan has been to send partners to locales including Seattle, Atlanta, Dallas, and Toronto to shrink the distance to clients.

The bank's shares have fallen 6 percent in the last month and are about 21 percent below its high this year. Concern over lackluster trading revenue and slowing activity in mergers markets is weighing on Goldman and its investment bank rival Morgan Stanley more than other banks.